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Volatility transmission between stock and foreign exchange markets: A connectedness analysis

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Fernández-Rodríguez, Fernando and Sosvilla-Rivero, Simón (2020) Volatility transmission between stock and foreign exchange markets: A connectedness analysis. Applied Economics, 52 (19). pp. 2096-2108. ISSN 1466-4283

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Official URL: https://doi.org/10.1080/00036846.2019.1683143



Abstract

This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to May 2018. 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 Yılmaz (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 behavior 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:Article
Uncontrolled Keywords:Stock markets; Foreign exchange rates; Market linkages; Vector autoregression; Variance decomposition.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Finance
Social sciences > Economics > Stock exchanges
JEL:C53, F31, G15
ID Code:59955
Deposited On:15 Apr 2020 12:11
Last Modified:16 Apr 2020 08:19

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