IDEAS home Printed from https://ideas.repec.org/a/khe/scajes/v3y2017i1p29-38.html
   My bibliography  Save this article

Returns Effect, Shocks and Volatility Transmission between Foreign Exchange-Stock Markets in Nigeria

Author

Listed:
  • Agya Atabani Adi

Abstract

The paper examined effect of passed return on current return, shocks spillover and volatility transmission between FX-Stock markets. Using result obtained from VAR-GARCH models, we also calculate the optimal weight and risk minimizing hedging ratio for FX-Stock markets and employed the newly developed bivariate GARCH framework Findings reveal evidence of short term predictability in both markets through time. One period lagged returns significantly impact current return in both markets, and impact was greater in FX market both VAR-GARCH and VAR-AGARCH models. There were evidence of bi-directional volatility transmission in both markets and uni-directional shocks spillover from stock to FX market in both models. VAR-AGARCH model showed evidence of leverage effect; bad news has more impact on volatility than positive news of the same magnitude. We showed that optimal polio of FX-Stock market should holds more foreign exchange to stocks in their asset polio. Our result showed evidence of effective hedging in FX-Stock markets in Nigerian. Hence, the inclusion of stocks in diversified polio of foreign exchange could improve it risks adjusted performance of hedging ratio.

Suggested Citation

  • Agya Atabani Adi, 2017. "Returns Effect, Shocks and Volatility Transmission between Foreign Exchange-Stock Markets in Nigeria," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 3(1), pages 29-38, March.
    • Handle: RePEc:khe:scajes:v:3:y:2017:i:1:p:29-38
    as

    Download full text from publisher

    File URL: http://www.ajes.ro/wp-content/uploads/AJES_article_1_85.pdf
    Download Restriction: no
    File URL: http://www.ajes.ro/wp-content/uploads/AJES_article_1_85.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(2), pages 280-310, April.
    2. Engle, Robert F & Ito, Takatoshi & Lin, Wen-Ling, 1990. "Meteor Showers or Heat Waves? Heteroskedastic Intra-daily Volatility in the Foreign Exchange Market," Econometrica, Econometric Society, vol. 58(3), pages 525-542, May.
    3. Chia-Lin Chang & Thanchanok Khamkaew & Roengchai Tansuchat & Michael McAleer, 2011. "Interdependence of International Tourism Demand and Volatility in Leading ASEAN Destinations," Tourism Economics, , vol. 17(3), pages 481-507, June.
    4. Angelos Kanas, 2000. "Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3‐4), pages 447-467, April.
    5. Lumengo Bonga-Bonga & Jamela Hoveni, 2013. "Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa in the 1995-2010 Period," South African Journal of Economics, Economic Society of South Africa, vol. 81(2), pages 260-274, June.
    6. Pradiptarathi Panda & Malabika Deo, 2014. "Asymmetric and Volatility Spillover Between Stock Market and Foreign Exchange Market: Indian Experience," The IUP Journal of Applied Finance, IUP Publications, vol. 20(4), pages 69-82, October.
    7. Jamela Hoveni & Lumengo Bonga-Bonga, 2011. "Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa," Working Papers 252, Economic Research Southern Africa.
    8. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    9. Grobys, Klaus, 2015. "Are volatility spillovers between currency and equity market driven by economic states? Evidence from the US economy," Economics Letters, Elsevier, vol. 127(C), pages 72-75.
    10. Richard T. Baillie & Tim Bollerslev, 1991. "Intra-Day and Inter-Market Volatility in Foreign Exchange Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 565-585.
    11. Chaker Aloui, 2007. "Price and volatility spillovers between exchange rates and stock indexes for the pre- and post-euro period," Quantitative Finance, Taylor & Francis Journals, vol. 7(6), pages 669-685.
    12. Aliyu, Shehu Usman Rano, 2009. "Stock Prices and Exchange Rate Interactions in Nigeria: An Intra-Global Financial Crisis Maiden Investigation," MPRA Paper 13283, University Library of Munich, Germany, revised 09 Feb 2009.
    13. Alexey Yurievich Mikhaylov, 2018. "Volatility Spillover Effect between Stock and Exchange Rate in Oil Exporting Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 8(3), pages 321-326.
    14. 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.
    15. Naeem Muhammad & Abdul Rasheed, 2002. "Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 535-550.
    16. Jayasinghe, Prabhath & Tsui, Albert K., 2008. "Exchange rate exposure of sectoral returns and volatilities: Evidence from Japanese industrial sectors," Japan and the World Economy, Elsevier, vol. 20(4), pages 639-660, December.
    17. Diamandis, Panayiotis F. & Drakos, Anastassios A., 2011. "Financial liberalization, exchange rates and stock prices: Exogenous shocks in four Latin America countries," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 381-394, May.
    18. Shehu Usman Rano Aliyu, 2009. "Stock Prices and Exchange Rate Interactions in Nigeria: A Maiden Intra-Global Financial Crisis Investigation," The IUP Journal of Financial Economics, IUP Publications, vol. 0(3 & 4), pages 7-23, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. KHATTAB Ahmed & SALMI Yahya, 2021. "Modeling Sources of Asymmetry in the Volatility of the Moroccan Dirham Exchange Rate," Applied Economics and Finance, Redfame publishing, vol. 8(4), pages 31-41, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bonga-Bonga, Lumengo & Gnagne, Pascal Xavier, 2017. "The impact of exchange rate volatility on capital flows in BRICS economies," MPRA Paper 84773, University Library of Munich, Germany.
    2. Manish Kumar, 2011. "Return and volatility spillovers: evidence from Indian exchange rates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 3(4), pages 371-387.
    3. Bubák, Vít & Kocenda, Evzen & Zikes, Filip, 2011. "Volatility transmission in emerging European foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2829-2841, November.
    4. Diebold, Francis X. & Yilmaz, Kamil, 2015. "Financial and Macroeconomic Connectedness: A Network Approach to Measurement and Monitoring," OUP Catalogue, Oxford University Press, number 9780199338306.
    5. Dahiru A. Balaa & Taro Takimotob, 2017. "Stock markets volatility spillovers during financial crises: A DCC-MGARCH with skewed-t density approach," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(1), pages 25-48, March.
    6. Allen, David E. & McAleer, Michael & Powell, Robert J. & Singh, Abhay K., 2017. "Volatility Spillovers from Australia's major trading partners across the GFC," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 159-175.
    7. Haakon Kavli & Kevin Kotzé, 2014. "Spillovers in Exchange Rates and the Effects of Global Shocks on Emerging Market Currencies," South African Journal of Economics, Economic Society of South Africa, vol. 82(2), pages 209-238, June.
    8. Mohini GUPTA & Purwa SRIVASTAVA & Amritkant MISHRA & Malayaranjan SAHOO, 2021. "Time-varying volatility spillover of foreign exchange rate in three Asian markets: Based on DCC-GARCH approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(629), W), pages 105-120, Winter.
    9. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    10. Baruník, Jozef & Kočenda, Evžen & Vácha, Lukáš, 2017. "Asymmetric volatility connectedness on the forex market," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 39-56.
    11. Bill B. Francis & Iftekhar Hasan & Delroy M. Hunter, 2004. "Return-volatility linkages in the international equity and currency markets," Finance 0405022, University Library of Munich, Germany.
    12. Chkili, Walid & Nguyen, Duc Khuong, 2014. "Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries," Research in International Business and Finance, Elsevier, vol. 31(C), pages 46-56.
    13. 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.
    14. Warshaw, Evan, 2020. "Asymmetric volatility spillover between European equity and foreign exchange markets: Evidence from the frequency domain," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 1-14.
    15. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
    16. Prabhath Jayasinghe & Albert K. Tsui & Zhaoyong Zhang, 2014. "Exchange Rate Exposure of Sectoral Returns and Volatilities: Further Evidence From Japanese Industrial Sectors," Pacific Economic Review, Wiley Blackwell, vol. 19(2), pages 216-236, May.
    17. David McMillan & Isabel Ruiz & Alan Speight, 2010. "Correlations and spillovers among three euro rates: evidence using realised variance," The European Journal of Finance, Taylor & Francis Journals, vol. 16(8), pages 753-767.
    18. Eli Bouri & Andre Eid & Imad Kachacha, 2014. "The Dynamic Behaviour and Determinants of Linkages among Middle Eastern and North African Stock Exchanges," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 1-22, March.
    19. Gnagne, Pascal Xavier & Bonga-Bonga, Lumengo, 2020. "The Impact of Exchange Rate Volatility on the Security Markets in BRICS Economies," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 73(1), pages 21-50.
    20. Ngo Thai Hung, 2022. "Spillover Effects Between Stock Prices and Exchange Rates for the Central and Eastern European Countries," Global Business Review, International Management Institute, vol. 23(2), pages 259-286, April.

    More about this item

    Keywords

    Shocks and Volatility Spillover; Foreign Exchange-Shock market; Returns Impact in Nigeria;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:khe:scajes:v:3:y:2017:i:1:p:29-38. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Adi Sava (email available below). General contact details of provider: https://edirc.repec.org/data/ffucdro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.