Dynamics of Price and Volatility Spillovers Among Stock and Foreign Exchanges: Evidence from South Asian Countries

Smrk Samarakoon, Rudra P. Pradhan (), Eain Ediriweeera and Rana P. Maradana
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Smrk Samarakoon: Wayamba University of Sri Lanka, Sri Lanka & Indian Institute of Technology Kharagpur, India
Rudra P. Pradhan: ndian Institute of Technology Kharagpur, India
Eain Ediriweeera: Wayamba University of Sri Lanka, Sri Lanka
Rana P. Maradana: Indian Institute of Technology Hyderabad, India

Journal of Economic Development, 2024, vol. 49, issue 2, 111-138

Abstract: Our study focused on exploring the volatility spillover between foreign currency and stock markets, as well as the price dynamics of financial instruments traded in South Asian countries. We use daily data from 2001 to 2021 on the closing exchange rates of local currency to the US dollar and closing stock price indices of these countries. To capture the volatility spillover effect, we utilized the GARCH-BEKK model and used Granger Causality test results to test the price dynamics of these markets. Our findings revealed that the own volatility shocks significantly affect current market behavior and volatility effects spill over bi-directionally between foreign exchange rates and stock price indices in these countries. This study provides valuable insights for both domestic and international investors to understand the South Asian stock and foreign exchange markets, enabling them to make more efficient investment decisions based on the best market conditions.

Keywords: GARCH BEKK Model; Volatility Spillover Effect; South Asian Markets (search for similar items in EconPapers)
JEL-codes: B22 E44 F31 (search for similar items in EconPapers)
Date: 2024
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