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Time-Varying Spillover between Currency and Stock Markets in the United States: More than Two Centuries of Historical Evidence

Author

Listed:
  • Semei Coronado

    (Independent Consultant. 16366 Avenida Venusto Unit C, San Diego, CA, 92128, U.S.)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

  • Besma Hkiri

    (Department of Finance and Economics, College of Business, University of Jeddah, Jeddah, Saudi Arabia)

  • Omar Rojas

    (Universidad Panamericana, Facultad de Ciencias Económicas y Empresariales, Álvaro del Portillo 49, Zapopan, Jalisco, 45010, Mexico)

Abstract

In this paper, we analyze time-varying causality between the dollar-pound exchange rate and S&P 500 returns over the monthly period of September, 1791 to September, 2019. Based on a Dynamic Conditional Correlation-Multivariate Generalised Autoregressive Conditional Heteroskedasticity (DCC-MGARCH) framework, we find that evidence of unidirectional causality between the two returns is in general weak, and primarily restricted to the period following the breakdown of the Bretton Woods agreement. However, instantaneous spillover across the returns of these two markets is quite strong, which in turn tends to suggest the existence of nonsynchronous trading and also high-frequency causal dependency, with the latter confirmed based on daily data covering January 3rd, 1900 to October 4th, 2019. Moreover, the underlying DCC reveals that there is actually portfolio diversification opportunities for investors. Finally, an analysis of the second moments reveal much stronger evidence of volatility spillover between these two assets, when compared to the return linkages. This result has important implications from the perspective of policy making aiming to reduce the impact of uncertainty on the real economy.

Suggested Citation

  • Semei Coronado & Rangan Gupta & Besma Hkiri & Omar Rojas, 2020. "Time-Varying Spillover between Currency and Stock Markets in the United States: More than Two Centuries of Historical Evidence," Working Papers 202060, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202060
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    References listed on IDEAS

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    Cited by:

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    2. Celso-Arellano, Pedro & Gualajara, Victor & Coronado, Semei & Martinez, Jose N. & Venegas-Martínez, Francisco, 2023. "Impact of the global fear index (covid-19 panic) on the S&P global indices associated with natural resources, agribusiness, energy, metals and mining: Granger Causality and Shannon and Rényi Transfer ," MPRA Paper 117138, University Library of Munich, Germany, revised 06 Feb 2023.
    3. Caporin, Massimiliano & Costola, Michele, 2022. "Time-varying Granger causality tests in the energy markets: A study on the DCC-MGARCH Hong test," Energy Economics, Elsevier, vol. 111(C).
    4. Caporina, Massimiliano & Costola, Michele, 2021. "Time-varying granger causality tests for applications in global crude oil markets: A study on the DCC-MGARCH Hong test," SAFE Working Paper Series 324, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Time-varying Granger causality; currency and equity markets; returns and volatilities;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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