Volatility Transmission between Stock and Exchange-Rate Markets: A Connectedness Analysis

BATH ECONOMICS RESEARCH PAPERS, No. 54/16

32 Pages Posted: 13 Oct 2016

See all articles by Fernando Fernández Rodríguez

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: October 12, 2016

Abstract

This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to January 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each market. To gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness during the financial turmoil periods experienced in the sample period Our results suggest that slightly more than half of the total variance of the forecast errors is explained by shocks across markets rather than by idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.

Keywords: Stock markets, Exchange rates, Market Linkages, Vector Autoregression, Variance Decomposition.

JEL Classification: C53, E44, F31, G15

Suggested Citation

Fernández Rodríguez, Fernando and Sosvilla-Rivero, Simon, Volatility Transmission between Stock and Exchange-Rate Markets: A Connectedness Analysis (October 12, 2016). BATH ECONOMICS RESEARCH PAPERS, No. 54/16. Available at SSRN: https://ssrn.com/abstract=2851386 or http://dx.doi.org/10.2139/ssrn.2851386

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

Campus de Tafira
E-35017 Las Palmas
Spain
+34 928 45 18 02 (Phone)
+34 928 45 18 29 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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