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Return and Volatility Spillover between Stock Prices and Exchange Rates in Croatia: A Spillover Methodology Approach

Tihana Škrinjarić (), Lidija Dedi () and Boško Šego ()
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Lidija Dedi: Department of managerial economics, Faculty of Economics and Business, University of Zagreb, Croatia
Boško Šego: Department of Mathematics, Faculty of Economics and Business, University of Zagreb, Croatia

Journal for Economic Forecasting, 2021, issue 1, 93-108

Abstract: The relationship between stock prices, returns and exchange rates is important for policymakers for tailoring macroeconomic policies that will promote economic growth. It is also important for potential investors who consider real investment projects and forecast asset returns and risks. This research focuses on the stock return and exchange rates co-movements in Croatia, by utilizing a VAR model and spillover index of Diebold and Yilmaz (2009). Empirical research is provided for the Croatian market, which has yet not been implemented in such a manner. Based on the results from the analysis, it can be concluded from a portfolio standpoint that return spillovers from exchange rates to stock returns were greater than volatility spillovers. This could have potential in hedging portfolio strategies. The same is true for the direction from stock to exchange rates returns and volatility.

Keywords: The relationship between stock prices; returns and exchange rates is important for policymakers for tailoring macroeconomic policies that will promote economic growth. It is also important for potential investors who consider real investment projects and forecast asset returns and risks. This research focuses on the stock return and exchange rates co-movements in Croatia; by utilizing a VAR model and spillover index of Diebold and Yilmaz (2009). Empirical research is provided for the Croatian market; which has yet not been implemented in such a manner. Based on the results from the analysis; it can be concluded from a portfolio standpoint that return spillovers from exchange rates to stock returns were greater than volatility spillovers. This could have potential in hedging portfolio strategies. The same is true for the direction from stock to exchange rates returns and volatility. (search for similar items in EconPapers)
JEL-codes: C1 F31 G12 (search for similar items in EconPapers)
Date: 2021
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