Volatility Spillover between Developed and Developing Countries: The Global Foreign Exchange Market’s Channel (original) (raw)
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Volatility Spillovers among Developed and Developing Countries: The Global Foreign Exchange Markets
2021
In this paper, we investigate the “static and dynamic” return and volatility spillovers’ transmission across developed and developing countries. Quoted against the US dollar, we study twenty-three global currencies over the time period 2005–2016. Focusing on the spillover index methodology, the generalised VAR framework is employed. Our findings indicate no evidence of bi-directional return and volatility spillovers between developed and developing countries. However, unidirectional volatility spillovers from developed to developing countries are highlighted. Furthermore, our findings document significant bi-directional volatility spillovers within the European region (Eurozone and non-Eurozone currencies) with the British pound sterling (GBP) and the Euro (EUR) as the most significant transmitters of volatility. The findings reiterate the prominence of volatility spillovers to financial regulators.
Volatility spillovers in equity and foreign exchange markets: Evidence from emerging economies
Journal of Economic and Financial Sciences
Orientation: This study investigated the relationship between the equity markets and foreign exchange markets in Brazil, Russia, India, China and South Africa (BRICS).Research purpose: This study examined the financial connectedness through volatility spillovers and co-movements among equity and foreign exchange markets in the BRICS countries to better understand market interdependencies.Motivation for the study: The literature mainly focused on volatility transmission from developed countries.Research approach: This research, used the Diebold and Yilmaz spillover index approach (DY index). The DY index is based on variance decompositions (VD) and impulse response functions that use a vector autoregressive (VAR) modelling framework. The study period was from 02 January 1997 to 31 December 2018.Main findings: Shocks from the equity markets dominate the foreign exchange markets, while foreign exchange markets dominate their equity markets at an individual level. There are interdepende...
Volatility Spillover in Foreign Exchange Markets
The recent financial crisis in the US and then the debt crisis in Europe have impacted the economical performance of the world in general, particularly the financial performance. With the increase in globalization and cross-border trade, the dependence of one economy on others increases. Portfolio diversification theory proposed by Markowitz, in 1952, suggests that if two markets are not significantly correlated, taking a position in that market helps in reducing the risk of the portfolio. The recent turmoil in these two markets (US and Europe) has affected the entire world and a lot of volatility has been observed in all financial markets around the world. Hence, it becomes imperative to identify the volatility spillover effect from one market to the other at this point. This article examines the volatility spillover of one market on other by taking five exchange rate markets: Great Britain pound (GBP), Euro (EUR), Canadian dollar (CAD) and Australian dollar (AUD) and Japanese yen (JPY) against the US dollar. Data from June 2008 to December 2012 were taken for consideration. Unit root test was used to identify the stationarity of data and the variance decomposition method was applied to identify the degree of influence of one market on other. The volatility spillo-ver index, as suggested by Diebold and Yilmaz (2009), was created to identify the return spillover effect. Outcomes suggest that volatility on JPY and CAD follows the concept 'better to give than receive', while GBP as the net receiver goes along with the findings of Nikolaos (2012). A volatility spillover index of 11.11 per cent indicates low possibility of volatility transmission among considered currency pairs. This article will help traders, portfolio managers, policy makers and other market participants identify the source of volatility in considered currency markets and to take corrective measures.
Volatility Spillovers between Foreign-Exchange and Stock Markets
SSRN Electronic Journal, 2016
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,
Volatility spillovers among global stock markets: measuring total and directional effects
Empirical Economics, 2017
In this study we construct volatility spillover indexes for some of the major stock market indexes in the world. We use a DCC-GARCH framework for modelling the multivariate relationships of volatility among markets. Extending the framework of Diebold and Yilmaz [2012] we compute spillover indexes directly from the series of returns considering the time-variant structure of their covariance matrices. Our spillover indexes use daily stock market data of Australia, Canada, China, Germany, Japan, the United Kingdom, and the United States, for the period January 2001 to August 2016. We obtain several relevant results. First, total spillovers exhibit substantial time-series variation, being higher in moments of market turbulence. Second, the net position of each country (transmitter or receiver) does not change during the sample period. However, their intensities exhibit important time-variation. Finally, transmission originates in the most developed markets, as expected. Of special relevance, even though the Chinese stock market has grown importantly over time, it is still a net receiver of volatility spillovers.
Exchange return co-movements and volatility spillovers before and after the introduction of euro
Journal of International Financial Markets, Institutions and Money, 2012
This paper examines co-movements and volatility spillovers in the returns of the euro, the British pound, the Swiss franc and the Japanese yen vis-à-vis the US dollar before and after the introduction of the euro. Based on dynamic correlations, variance decompositions, generalized VAR analysis, and a newly introduced spillover index, the results suggest significant co-movements and volatility spillovers across the four exchange returns, but their extend is, on average, lower in the latter period. Return co-movements and volatility spillovers show large variability though, and are positively associated with extreme economic episodes and, to a lower extend, with appreciations of the US dollar. Moreover, the euro (Deutsche mark) is the dominant currency in volatility transmission with a net volatility spillover of 8% (15%) to all other markets, while the British pound is the dominant net receiver of volatility with a net volatility spillover of -11% (-13%), in the post-(pre-) euro period. The nature of crossmarket volatility spillovers is found to be bidirectional though, with the highest volatility spillovers occurring between the European markets. The economic implications of these findings for central bank interventions, international portfolio diversification and currency risk management are then discussed. JEL : C32; F31; G15 Abstract This paper examines co-movements and volatility spillovers in the returns of the euro, the British pound, the Swiss franc and the Japanese yen vis-à-vis the US dollar before and after the introduction of the euro. Based on dynamic correlations, variance decompositions, generalized VAR analysis, and a newly introduced spillover index, the results suggest significant co-movements and volatility spillovers across the four exchange returns, but their extend is, on average, lower in the latter period. Return co-movements and volatility spillovers show large variability though, and are positively associated with extreme economic episodes and, to a lower extend, with appreciations of the US dollar. Moreover, the euro (Deutsche mark) is the dominant currency in volatility transmission with a net volatility spillover of 8% (15%)
We employ an Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) model to examine the volatility spillover effects between stock prices and exchange rates in three developed and three emerging countries, across the recent pre-financial-crisis, crisis and post-crisis periods. The evidence indicates asymmetric volatility spillover effects between stock prices and exchange rates in both developed and emerging economies during the financial crisis. The findings of the significant volatility spillover effects between exchange rates and stock prices imply that the markets are informationally inefficient, and one market has significant predictive power on the other.
Volatility spillover in the foreign exchange market: the Indian experience
Macroeconomics and Finance in Emerging Market Economies, 2014
We find evidences of significant volatility co-movements and/ or spillover from different financial markets to forex market for Indian economy. Among a large number of variables examined, volatility spillovers from stock market, government securities market, overnight index swap, Ted spread and international crude oil prices to the foreign exchange market are found to be most important. Empirical findings also indicate that the volatility spillover differed across variables in terms of their influence through shocks and in terms of lagged volatility (persistence) coefficients. There are evidences of asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis periods indicate that the reform measures and changes in financial markets microstructure during the crisis period had significant impact on volatility spillover. During the post-crisis period, it is the past volatility (persistent or fundamental) changes, rather than the temporary shocks, that had significant spillover effect on forex volatility. There are evidences of decline in asymmetric response in the forex market during the post-crisis period for the Indian economy.
New International Perspectives, 2010
This paper investigates the nature of volatility spillovers between stock returns and a number of exchange rates changes for the G-7 countries for the 1996-2006 period. We divide our sample into a number of sub periods, prior to and after the introduction of the Euro, we use EGARCH modelling which takes into account whether bad news has the same impact on volatility as good news. Our results show that in terms of volatility spillover effects from stock returns to exchange rates returns, there is a large degree of consistency across counties and time periods with significant spillovers found for all countries, in all three periods, with the exception of Italy in the pre-Euro period. The impact of stock market volatility on exchange rates thus does not appear to have been altered significantly by the introduction of the Euro in the sense that the cross exchange rates against the $, Yen, £ and CHF existed prior to the introduction of the Euro as well as after it across nearly all G-7 markets In contrast, our results indicate that in terms of volatility spillovers from exchange rates to stock markets, the results are less consistent both across countries and over time but overall we find much less evidence supporting volatility spillovers from exchange rates to stock markets. There is however some commonality regarding which exchange rates we find significant volatility spillover effects to stock markets for the period after the Euro was introduced. The lack of significant spillovers from exchange rate changes to stock returns found here for some countries across a number of exchange rates is consistent with existing research in this area.