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Volatility transmission and asymmetric linkages between the stock and foreign exchange markets

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  • Tian Yong Fu
  • Mark J. Holmes
  • Daniel F.S. Choi

Abstract

Purpose - The purpose of this paper is to analyze volatility transmission between the Japanese stock and foreign exchange markets. Design/methodology/approach - In contrast to the existing literature, industry‐level stock data are applied to a trivariate Baba, Engle, Kraft and Kroner‐generalised autoregressive conditional heteroscedasticity (BEKK‐GARCH) model that also includes comparable US industrial stocks returns as a control variable. Findings - Using daily data over the study period 1994‐2007, it was found that news shocks in the Japanese currency market account for volatility transmission in eight of the ten industrial sectors considered. Evidence was also found of significant asymmetric effects in five of these industries. Research limitations/implications - While the BEKK‐GARCH model enables analysis of volatility transmission between the stock and foreign markets against a background of conditional correlation and asymmetries, the model requires the estimation of a large number of parameters, which can be problematic for a limited dataset. Originality/value - The paper's findings have important implications for understanding international volatility transmission involving the stock and foreign exchange markets. This in turn can provide insight into investor behaviour.

Suggested Citation

  • Tian Yong Fu & Mark J. Holmes & Daniel F.S. Choi, 2011. "Volatility transmission and asymmetric linkages between the stock and foreign exchange markets," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(1), pages 36-50, March.
    • Handle: RePEc:eme:sefpps:v:28:y:2011:i:1:p:36-50
    DOI: 10.1108/10867371111110543
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    References listed on IDEAS

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    6. Long, Ling & Tsui, Albert K. & Zhang, Zhaoyong, 2014. "Estimating time-varying currency betas with contagion: New evidence from developed and emerging financial markets," Japan and the World Economy, Elsevier, vol. 30(C), pages 10-24.
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