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Return and volatility spillovers in three euro exchange rates

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  • McMillan, David G.
  • Speight, Alan E.H.
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    Abstract

    This paper analyses the nature and extent of interdependence, and return and volatility spillovers, in three euro exchange rates, namely the US dollar, Japanese yen and British pound sterling. Using the realised variance method in order to avoid pitfalls inherent in the GARCH methodology, we consider such effects at several time horizons over the trading day. Substantial evidence is reported of contemporaneous relationships between returns on these rates, and their volatility, with some further market-specific spillovers between returns and volatility. Variance decompositions from an estimated VAR suggest that the dollar rate dominates the other two rates in terms of both return and volatility spillovers. That is, innovations to the sterling and yen rates have, at best, a marginal effect on the dollar whilst, in contrast, news affecting the dollar can account for as much as 30% of the movement in sterling and yen returns and volatility. Further, using the recently introduced spillovers index, which is derived from the variance decomposition and examines the degree of cross-market spillover error variance relative to total variance, our results show that the extent of spillovers within these series increases with temporal aggregation from the 10-min to half-day frequency, but remains constant thereafter.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 62 (2010)
    Issue (Month): 2 (March)
    Pages: 79-93

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    Handle: RePEc:eee:jebusi:v:62:y::i:2:p:79-93

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Exchange rates Common volatility Return spillovers Volatility spillovers Realised volatility;

    References

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    Cited by:
    1. Nikolaos Antonakakis, 2012. "Exchange Return Co-movements and Volatility Spillovers Before and After the Introduction of Euro," FIW Working Paper series 080, FIW.
    2. Mina Dragouni & George Filis & Nikolaos Antonakakis, 2013. "Time-Varying Interdependencies of Tourism and Economic Growth: Evidence from European Countries," FIW Working Paper series 128, FIW.
    3. Jozef Barunik & Evzen Kocenda & Lukas Vacha, 2013. "Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market?," Papers 1308.1221, arXiv.org, revised Jul 2014.
    4. Nikolaos Antonakakis & Max Breitenlechner & Johann Scharler, 2014. "How Strongly are Business Cycles and Financial Cycles Linked in the G7 Countries?," Working Papers 2014-07, Faculty of Economics and Statistics, University of Innsbruck.

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