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Price and Volatility Spillovers between Stock Prices and Exchange Rates: Empirical Evidence from the G-7 Countries

  • Sheng-Yung Yang

    (Department of Finance, National Chung Hsing University, Taiwan)

  • Shuh-Chyi Doong

    (Department of Finance, National Chung Hsing University, Taiwan)

This paper explores the nature of the mean and volatility transmission mechanism between stock and foreign exchange markets for the G-7 countries. Empirical evidence supports the asymmetric volatility spillover effect and shows that movements of stock prices will affect future exchange rate movements, but changes in exchange rates have less direct impact on future changes of stock prices. The implication is particularly important to international portfolio managers when devising hedging and diversification strategies for their portfolios.

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Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

Volume (Year): 3 (2004)
Issue (Month): 2 (August)
Pages: 139-153

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Handle: RePEc:ijb:journl:v:3:y:2004:i:2:p:139-153
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  1. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  2. Gavin, Michael, 1989. "The stock market and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 8(2), pages 181-200, June.
  3. Lee, Tae-Hwy & Tse, Yiuman, 1996. "Cointegration tests with conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 73(2), pages 401-410, August.
  4. Laopodis, N. T., 1998. "Asymmetric volatility spillovers in deutsche mark exchange rates," Journal of Multinational Financial Management, Elsevier, vol. 8(4), pages 413-430, November.
  5. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  6. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Solnik, Bruno, 1987. " Using Financial Prices to Test Exchange Rate Models: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 141-49, March.
  9. Richard A. Ajayi & Mbodja Mougou─Ś, 1996. "On The Dynamic Relation Between Stock Prices And Exchange Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 193-207, 06.
  10. So, Raymond W., 2001. "Price and volatility spillovers between interest rate and exchange value of the US dollar," Global Finance Journal, Elsevier, vol. 12(1), pages 95-107.
  11. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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