Time-Varying Spillovers between Currency and Stock Markets in the USA: Historical Evidence From More than Two Centuries

Semei Coronado, Rangan Gupta, Besma Hkiri and Omar Rojas
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Semei Coronado: Independent Consultant
Besma Hkiri: Department of Finance and Economics, University of Jeddah, Saudi Arabia
Omar Rojas: Facultad de Ciencias Económicas y Empresariales, Universidad Panamericana, México

Advances in Decision Sciences, 2020, vol. 24, issue 4, 44-76

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 Heterosckedasticity (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 spillovers 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 3 January 1900 – 4 October 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 spillovers 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.

Keywords: Time-varying Granger causality; currency and equity markets; returns and volatilities. (search for similar items in EconPapers)
JEL-codes: C32 F31 G10 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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