Time-Varying Spillover between Currency and Stock Markets in the United States: More than Two Centuries of Historical Evidence (original) (raw)

2020

Abstract

In this paper, we analyze time-varying causality between the dollar-pound exchange rate and S&P 500 returns over the monthly period of September, 1791 to September, 2019. Based on a Dynamic Conditional Correlation-Multivariate Generalised Autoregressive Conditional Heteroskedasticity (DCC-MGARCH) framework, we find that evidence of unidirectional causality between the two returns is in general weak, and primarily restricted to the period following the breakdown of the Bretton Woods agreement. However, instantaneous spillover across the returns of these two markets is quite strong, which in turn tends to suggest the existence of nonsynchronous trading and also high-frequency causal dependency, with the latter confirmed based on daily data covering January 3rd, 1900 to October 4th, 2019. Moreover, the underlying DCC reveals that there is actually portfolio diversification opportunities for investors. Finally, an analysis of the second moments reveal much stronger evidence of volatilit...

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