Modelling Return and Volatility Spillovers in Global Foreign Exchange Markets

Afees Salisu, Oluwatomisin Oyewole and Ismail Fasanya

No 30, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: In this paper, we measure return and volatility spillovers in global foreign exchange (FX) markets using six most traded currency pairs in the world namely the aussie, cable, euro, gropher, loonie and swissie. We employ the Diebold and Yilmaz (2012) approach and consequently, we compute Total Spillover, Directional Spillover and Net Spillover indexes. We utilize daily data from Jaunary 01 1999 to December 31, 2014. We also carry out rolling sample analyses in order to capture secular and cyclical movements in global FX markets. We find evidence of interdependence among the major traded currency pairs based on the spillover indexes. In addition, return spillovers exhibit mild trends and bursts while volatility spillovers exhibit significant bursts but no trends. We also identify crisis episodes that seem to have influenced the recorded fluctuations in returns and volatilities of global FX markets. Our results are robust to the VAR lag structure, forecast horizon and rolling window width.

Keywords: FX market; Returns; Volatilities; Vector autoregression (VAR); Forecast error variance; Spillover index (search for similar items in EconPapers)
JEL-codes: F31 G15 Q54 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-09
New Economics Papers: this item is included in nep-fmk and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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