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Interrelationship and Spillover Effect between Stock and Exchange Rate Markets in the Major Emerging Economies

Author

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  • Jovan Njegić
  • Dejan Živkov
  • Irena Janković

Abstract

This paper analyses the dynamic nexus and bidirectional spillover effect between stocks and exchange rates in seven major emerging markets and one developed market. Three types of BEKK-GARCH models were utilized in the research process - basic BEKK-GARCH, asymmetric BEKK-GARCH and asymmetric BEKK-GARCH with structural breaks. Model with breaks gave the best fitting results in six out of eight cases. VAR based volatility spillover method serves as a complementary methodology. Results showed that dynamic connection between two major asset classes behaves in accordance with the portfolio balanced approach in emerging markets, while the nexus is in line with the flow oriented theory in the US market. In addition, according to the BEKK-GARCH results, shock and volatility spillover effect is predominantly directed from exchange rate market to stock market in all countries, while in the VAR based model it is not so obvious.

Suggested Citation

  • Jovan Njegić & Dejan Živkov & Irena Janković, 2018. "Interrelationship and Spillover Effect between Stock and Exchange Rate Markets in the Major Emerging Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(3), pages 270-292.
    • Handle: RePEc:prg:jnlpep:v:2018:y:2018:i:3:id:669:p:270-292
    DOI: 10.18267/j.pep.669
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    References listed on IDEAS

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    1. Dejan Živkov & Jovan Njegić & Vera Mirović, 2016. "Dynamic Nexus between Exchange Rate and Stock Prices in the Major East European Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(6), pages 686-705.
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    Cited by:

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    3. Huang, Qian & Wang, Xiangning & Zhang, Shuguang, 2021. "The effects of exchange rate fluctuations on the stock market and the affecting mechanisms: Evidence from BRICS countries," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    stocks; exchange rate; BEKK-GARCH; structural breaks;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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