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Are There Asymmetries in the Relationship Between Exchange Rate Fluctuations and Stock Market Volatility in Pacific Basin Countries?

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Author Info

  • Nabil Maghrebi

    ()
    (Faculty of Economics, Wakayama University, Sakaedani 930, Wakayama 640-8510, Japan)

  • Mark J. Holmes

    ()
    (Department of Economics, Waikato University Management School, Private Bag 3105, Hamilton, New Zealand)

  • Eric J. Pentecost

    ()
    (Department of Economics, Loughborough University, Leicestershire LE11 3TU, United Kingdom)

Abstract

This paper examines asymmetries in the dynamic relationship between foreign exchange fluctuations and stock market volatility in Pacific basin countries. The methodology is based on a dynamic covariance modelling that accounts for leverage effects and the asymmetric impact of currency fluctuations. There is evidence that appreciations are more conducive to lower volatility in currency markets than depreciations of equal magnitude. Market volatility tends to be ceteris paribus, more sensitive to bad news about equity than good news and more responsive to currency depreciations than appreciations. The results also suggest that bad news about equity accompanied with currency depreciations are likely to generate higher volatility in currency markets and have the potential of affecting the significance of leverage effects in stock markets.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 09 (2006)
Issue (Month): 02 ()
Pages: 229-256

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Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:02:p:229-256

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Related research

Keywords: Asymmetric effects; stock market volatility; foreign exchange fluctuations; multivariate GARCH;

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Cited by:
  1. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 223-244, August.
  2. Tian Yong Fu & Mark J. Holmes & Daniel F.S. Choi, 2011. "Volatility transmission and asymmetric linkages between the stock and foreign exchange markets: A sectoral analysis," Studies in Economics and Finance, Emerald Group Publishing, vol. 28(1), pages 36-50, March.
  3. Ananda Jayawickrama & Tilak Abeysinghe, 2007. "Exchange Rate Exposure of Sectoral Returns and Volatilities : Evidence from Japanese Industrial Sectors," Microeconomics Working Papers 21925, East Asian Bureau of Economic Research.

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