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

Agya Adi ()

Academic Journal of Economic Studies, 2017, vol. 3, issue 1, 29-38

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.

Keywords: Shocks and Volatility Spillover; Foreign Exchange-Shock market; Returns Impact in Nigeria (search for similar items in EconPapers)
JEL-codes: C C5 C58 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:khe:scajes:v:3:y:2017:i:1:p:29-38