The Correlation between Fx Rate Volatility and Stock Exchange Returns Volatility: An Emerging Markets Overview
51 Pages Posted: 26 Mar 2006 Last revised: 27 Jul 2008
Date Written: September 2006
This paper examines the relationship between the volatilities of equity indexes returns and FX rates for a set of emerging countries. We study the sensitivity of sector indexes volatility to FX rates volatility of local currencies with respect to the U.S. Dollar, the British Pound, and the Japanese Yen. Our empirical results largely support the hypothesis of a positive transmission mechanism between volatilities in equity and FX rates markets.
Furthermore, although Ownership Restrictions and International Capital Market Controls have significant effects on the magnitude of the relation between FX rates volatility and stock returns volatility, the type of the FX rates regime does not affect this relationship. Our findings can be exploited for portfolios international diversification and adjustment of the risk management of multinational corporations. The model can also be extended using high frequency data.
Keywords: FX rates, volatility , contagion, stock returns, emerging markets
JEL Classification: F31, G15
Suggested Citation: Suggested Citation