Volatility Spillovers between Foreign-Exchange and Stock Markets

Bath Economics Research Papers, No. 58/17

62 Pages Posted: 12 Jan 2017

See all articles by Amalia Morales-Zumaquero

Amalia Morales-Zumaquero

University of Malaga - Departamento de Teoria e Historia Economica

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: December 13, 2016

Abstract

This paper empirically analyses the evidence of intra-spillovers and inter-spillovers between foreign exchange and stock markets in the seven economies which concentrate the majority of foreign exchange transactions (i.e. United Kingdom, Euro area, Australia, Swiss, Canada, United Kingdom and Japan), using daily data, during the period 1990 to 2015 and during the pre-global and post-global financial crisis periods. To that end, we employ two econometric methodologies: the C-GARCH methodology by Engle and Lee (1999) and the SVAR framework (Sohel Azad et al., 2015).

Results suggest that:

(i) permanent and transitory components of the conditional variance exhibit several well-known peaks in volatilities;

(ii) the long-run volatility relationships are stronger than the short-run linkages volatility with a reinforcement during the post-global financial crisis period;

(iii) the presence of intra-spillovers and inter-spillovers increases substantially during the post-global financial crisis period and

(iv) in all samples, the stock markets play a dominant role in the transmission of long-run and short-run volatility, except for in the period after the Global Financial Crisis, where the foreign-exchange markets are the main long-run volatility triggers.

Keywords: Stock markets, Exchange rates, Market spillovers, Component-GARCH model, Long-term volatility, Short-term volatility

JEL Classification: C32, F31, G15

Suggested Citation

Morales-Zumaquero, Amalia and Sosvilla-Rivero, Simon, Volatility Spillovers between Foreign-Exchange and Stock Markets (December 13, 2016). Bath Economics Research Papers, No. 58/17. Available at SSRN: https://ssrn.com/abstract=2897481 or http://dx.doi.org/10.2139/ssrn.2897481

Amalia Morales-Zumaquero

University of Malaga - Departamento de Teoria e Historia Economica ( email )

Malaga, Málaga 29004
Spain

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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