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Asymmetric effects and long memory in dynamic volatility relationships between stock returns and exchange rates

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  • Chkili, Walid
  • Aloui, Chaker
  • Nguyen, Duc Khuong

Abstract

We use univariate and multivariate GARCH-type models to investigate the properties of conditional volatilities of stock returns and exchange rates, as well as their empirical relationships. Taking three European stock markets and two popular US dollar exchange rates as case study, our results show strong evidence of asymmetry and long memory in the conditional variances of all the series considered. In multivariate settings we find that bilateral relationships between stock and foreign exchange markets are highly significant for France and Germany. Moreover, both the univariate FIAPARCH and bivariate CCC-FIAPARCH models provide more accurate in-sample estimates and out-of-sample forecasts than the other competing GARCH-based specifications in almost all cases. Finally, there is evidence to support the suitability of the FIAPARCH model in forecasting portfolio's market risk exposure and the existence of diversification benefits between stock and foreign exchange markets.

Suggested Citation

  • Chkili, Walid & Aloui, Chaker & Nguyen, Duc Khuong, 2012. "Asymmetric effects and long memory in dynamic volatility relationships between stock returns and exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 738-757.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:4:p:738-757
    DOI: 10.1016/j.intfin.2012.04.009
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    More about this item

    Keywords

    Asymmetry; Long memory; FIGARCH; FIAPARCH; Stock returns; Exchange rates;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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