Return-Volatility Linkages in the International Equity and Currency Markets
Bank of Finland Discussion Paper No. 9/2002
39 Pages Posted: 23 Jul 2002
Date Written: May 27, 2002
This paper, which is motivated by the literature on international asset pricing and recent work on exchange rate determination, investigates dynamic relationships between major currency and equity markets. Using a multivariate GARCH framework, we examine conditional cross-autocorrelations between pairs of national equity markets and related exchange rates. This provides a parsimonious way of testing mean-volatility relationships in currency and equity markets and re-examining the robustness of relationships between equity markets, while controlling for exchange rate effects. We find that the relationship between currency and equity markets is bi-directional, significant, persistent, and independent of the relationship strictly between equity markets, and that it is better captured by the conditional second moments.
Keywords: international asset pricing, exchange rate determination, equity markets, relationships between currency and equity markets
JEL Classification: G12, G14, G15, F31
Suggested Citation: Suggested Citation