Volatility transmission between stock and exchange-rate markets: A connectedness analysis

Fernando Fernández-Rodríguez and Simon Sosvilla-Rivero
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Fernando Fernández-Rodríguez: Universidad de Las Palmas de Gran Canaria

No 54/16, Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to January 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yõlmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each market. To gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness during the financial turmoil periods experienced in the sample period Our results suggest that slightly more than half of the total variance of the forecast errors is explained by shocks across markets rather than by idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.

Date: 2016
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Working Paper: Volatility transmission between stock and exchange-rate markets: A connectedness analysis (2016)
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