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Volatility transmission and asymmetric linkages between the stock and foreign exchange markets: A sectoral analysis

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Author Info

  • Tian Yong Fu
  • Mark J. Holmes
  • Daniel F.S. Choi

Abstract

Purpose – The purpose of this paper is to analyze volatility transmission between the Japanese stock and foreign exchange markets. Design/methodology/approach – In contrast to the existing literature, industry-level stock data are applied to a trivariate Baba, Engle, Kraft and Kroner-generalised autoregressive conditional heteroscedasticity (BEKK-GARCH) model that also includes comparable US industrial stocks returns as a control variable. Findings – Using daily data over the study period 1994-2007, it was found that news shocks in the Japanese currency market account for volatility transmission in eight of the ten industrial sectors considered. Evidence was also found of significant asymmetric effects in five of these industries. Research limitations/implications – While the BEKK-GARCH model enables analysis of volatility transmission between the stock and foreign markets against a background of conditional correlation and asymmetries, the model requires the estimation of a large number of parameters, which can be problematic for a limited dataset. Originality/value – The paper's findings have important implications for understanding international volatility transmission involving the stock and foreign exchange markets. This in turn can provide insight into investor behaviour.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

Volume (Year): 28 (2011)
Issue (Month): 1 (March)
Pages: 36-50

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Handle: RePEc:eme:sefpps:v:28:y:2011:i:1:p:36-50

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Related research

Keywords: Foreign exchange; Japan; Statistical distribution; Stock markets; Volatility;

References

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  1. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
  2. Susmel, Raul & Engle, Robert F., 1994. "Hourly volatility spillovers between international equity markets," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 3-25, February.
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  9. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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  12. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
  13. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  14. Chamberlain, Sandra & Howe, John S. & Popper, Helen, 1997. "The exchange rate exposure of U.S. and Japanese banking institutions," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 871-892, June.
  15. Nabil Maghrebi & Mark J. Holmes & Eric J. Pentecost, 2006. "Are There Asymmetries in the Relationship Between Exchange Rate Fluctuations and Stock Market Volatility in Pacific Basin Countries?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 229-256.
  16. Apergis, Nicholas & Rezitis, Anthony, 2001. "Asymmetric Cross-Market Volatility Spillovers: Evidence from Daily Data on Equity and Foreign Exchange Markets," Manchester School, University of Manchester, vol. 69(0), pages 81-96, Supplemen.
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Cited by:
  1. Vivek Bhargava & D.K. Malhotra, 2012. "The effects of volatility spillover in the US basis swap markets," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 5(3), pages 216-238.

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