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Volatility transmission between stock and exchange-rate markets: A connectedness analysis

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Fernández-Rodríguez, Fernando and Sosvilla-Rivero, Simón (2016) Volatility transmission between stock and exchange-rate markets: A connectedness analysis. [ Working Papers; nº 04, 2016, ISSN: 2530-0849 ]

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Abstract

This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to January 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yilmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each market. To gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness during the financial turmoil periods experienced in the sample period Our results suggest that slightly more than half of the total variance of the forecast errors is explained by shocks across markets rather than by idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Stock markets; Exchange rates; Market Linkages; Vector Autoregression; Variance Decomposition
Subjects:Social sciences > Economics > Commerce
Social sciences > Economics > Money
JEL:C53, E44, F31, G15
Series Name:Working Papers
Volume:2016
Number:04
ID Code:40762
Deposited On:12 Jan 2017 13:44
Last Modified:17 Feb 2017 09:02

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