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Dynamic Relations between International Equity and Currency Markets: The Role of Currency Order Flow

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Author Info

  • Bill B. Francis

    (Rensselaer Polytechnic Institute)

  • Iftekhar Hasan

    (Rensselaer Polytechnic Institute)

  • Delroy M. Hunter

    (University of South Florida)

Abstract

Previous research on the dynamic linkages between international financial markets focused on bivariate interequity or intercurrency relationships and do not allow a specific role for the currency or equity market, respectively. In this paper, we hypothesize that there are important, yet not well understood, dynamic relationships between international equity and currency markets and these are driven by information spillover via the mechanism of currency order flow. Using a trivariate asymmetric GARCH framework, we find that the relationships between equity and currency markets are significant, bidirectional, and pervasive. These relationships, which coexist with the relationships between U.S. and foreign equity markets, are much stronger in the volatilities than in the means. Importantly, we find strong support for our information spillover hypothesis where currency order flow is the economic mechanism by which information is transmitted.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 79 (2006)
Issue (Month): 1 (January)
Pages: 219-258

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Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:219-258

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2010. "Private information, stock markets, and exchange rates," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 186-210 Bank for International Settlements.
  2. Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.

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