Volatility spillover analysis between stocks and exchange rate markets in short and long terms in East European and Eurasian countries

Dejan Živkov, Marina Gajić-Glamočlija and Jasmina Đurašković

International Journal of Emerging Markets, 2022, vol. 18, issue 11, 5068-5086

Abstract: Purpose - This paper researches a bidirectional volatility transmission effect between stocks and exchange rate markets in the six East European and Eurasian countries. Design/methodology/approach - Research process involves creation of transitory and permanent volatilities via optimal component generalized autoregressive heteroscedasticity (CGARCH) model, while these volatilities are subsequently embedded in Markov switching model. Findings - This study’s results indicate that bidirectional volatility transmission exists between the markets in the selected countries, whereas the effect from exchange rate to stocks is stronger than the other way around in both short-term and long-term. In particular, the authors find that long-term spillover effect from exchange rate to stocks is stronger than the short-term counterpart in all countries, which could suggest that flow-oriented model better explains the nexus between the markets than portfolio-balance approach. On the other hand, short-term volatility transfer from stock to exchange rate is stronger than its long-term equivalent. Practical implications - This suggests that portfolio-balance theory also has a role in explaining the transmission effect from stock to exchange rate market, but a decisive fact is from which direction spillover effect is observed. Originality/value - This paper is the first one that analyses the volatility nexus between stocks and exchange rate in short and long term in the four East European and two Eurasian countries.

Keywords: Stocks and exchange rate markets; Volatility transmission; CGARCH model; Markov switching model (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-01-2021-0082

DOI: 10.1108/IJOEM-01-2021-0082

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