Volatility spillovers between real exchange rate returns and real stock price returns in Malaysia

This study analyses volatility spillovers between real exchange rate returns and real stock price returns in Malaysia. The component‐generalized autoregressive conditional heteroskedasticity model with asymmetric effect is used to decompose volatility into permanent or long‐run component and transitory or short‐run component. Permanent and transitory components of volatility are commonly high in the global financial crisis, 2008. The results of the seemingly unrelated regressions framework show that volatility spillovers of permanent component between real exchange rate returns and real stock price returns are stronger than volatility spillovers of transitory component between real exchange rate returns and real stock price returns. Moreover, volatility spillovers of permanent and transitory components between real Malaysian ringgit against the U.S. dollar return and real stock price returns are stronger than real Malaysian ringgit against the Japanese yen exchange rate return and real stock price returns. There is some evidence of Granger causality between real exchange rate returns and real stock price returns. On the whole, there is some evidence of the link between the exchange rate market and the stock market in Malaysia.