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Interactions between stock prices and exchange rates: An application of multivariate VAR-GARCH model

Author

Listed:
  • Charles O. Manasseh
  • Ndubuisi O. Chukwu
  • Felicia C. Abada
  • Jonathan E. Ogbuabor
  • Kenechukwu A. Onyeka
  • Okoro E. Okoro

Abstract

The study examined stock prices (SP) and exchange rate (ER) interactions with multivariate VAR-GARCH model using monthly data from January 2000 to October 2014. The results of the Engle and Granger and Johansen cointegration test show that there is stable long-term relationship between SP and ER. The empirical evidence of the VAR-GARCH model shows a significant mean spillover running from stock market to exchange market but not a mean spillover from exchange market to stock market. The variance equation results indicated the existence of bidirectional volatility transmission effect between SP and ERs, indicating the past innovations in stock market have the great effect on future volatility in foreign exchange market, and vice versa. The results have important implications for international portfolio managers in the portfolio diversification decisions and risk hedging strategies.

Suggested Citation

  • Charles O. Manasseh & Ndubuisi O. Chukwu & Felicia C. Abada & Jonathan E. Ogbuabor & Kenechukwu A. Onyeka & Okoro E. Okoro, 2019. "Interactions between stock prices and exchange rates: An application of multivariate VAR-GARCH model," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1681573-168, January.
    • Handle: RePEc:taf:oaefxx:v:7:y:2019:i:1:p:1681573
    DOI: 10.1080/23322039.2019.1681573
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    Cited by:

    1. Baklaci, Hasan Fehmi & Aydoğan, Berna & Yelkenci, Tezer, 2020. "Impact of stock market trading on currency market volatility spillovers," Research in International Business and Finance, Elsevier, vol. 52(C).
    2. Yutaka Kurihara & Akio Fukushima & Shinichiro Maeda, 2020. "Can Bitcoin’S Price Be A Predictor Of Stock Prices?," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 5(4), pages 50-55, April.
    3. Abdorasoul Sadeghi & Hussein Marzban & Ali Hussein Samadi & Karim Azarbaiejani & Parviz Rostamzadeh, 2022. "Financial intermediaries and speculation in the foreign exchange market: the role of monetary policy in Iran’s economy," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-26, December.

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