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Volatility spillover effect between financial markets: evidence since the reform of the RMB exchange rate mechanism

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  • Zhengde Xiong

    (Hunan University
    Hunan University)

  • Lijun Han

    (Hunan University)

Abstract

The volatility spillover effect between the foreign exchange and stock markets has been a major issue in economic and financial studies. In this paper, GC-MSV model was used to study the spillover effect between the foreign exchange market and the stock market after the reform of the RMB exchange rate mechanism. The empirical results show that there is a negative correlation of dynamic price spillovers between the foreign exchange and stock markets. There are asymmetric volatility spillover effects between these two markets for both RMB stages—continued RMB appreciation or constant RMB shock (a significant reduction in appreciation). However, this has been reduced over time. In conclusion, The RMB exchange rate is a key variable that can affect the internal and external equilibrium of the national economy in an open economic environment, and the stock market is capable of quickly reflecting subtle changes in the real economy. In order to keep the stability of the financial markets and the healthy and rapid development of national economy, some suggestions were proposed.

Suggested Citation

  • Zhengde Xiong & Lijun Han, 2015. "Volatility spillover effect between financial markets: evidence since the reform of the RMB exchange rate mechanism," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-12, December.
    • Handle: RePEc:spr:fininn:v:1:y:2015:i:1:d:10.1186_s40854-015-0009-2
    DOI: 10.1186/s40854-015-0009-2
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    Cited by:

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    4. Baklaci, Hasan Fehmi & Aydoğan, Berna & Yelkenci, Tezer, 2020. "Impact of stock market trading on currency market volatility spillovers," Research in International Business and Finance, Elsevier, vol. 52(C).
    5. Mostafa Ali & Gang Sun, 2017. "Dynamic Relations between Stock Price and Exchange Rate: Evidence from South Asia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 331-341.
    6. Khalil Jebran & Amjad Iqbal, 2016. "Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-20, December.
    7. Li, Wei & Lu, Xinsheng & Ren, Yongping & Zhou, Ying, 2018. "Dynamic relationship between RMB exchange rate index and stock market liquidity: A new perspective based on MF-DCCA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 508(C), pages 726-739.
    8. Devendra Kumar Jain & Naqeeb Ur-Rehman & Omonjon Ganiev & Kapil Arora, 2023. "Currencies of greater interest for central Asian economies: an analysis of exchange market pressure amid global and regional interdependence," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-18, December.

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