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Time-Varying Spillover between Currency and Stock Markets in the United States: More than Two Centuries of Historical Evidence

Semei Coronado (), Rangan Gupta (), Besma Hkiri () and Omar Rojas ()
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Semei Coronado: Independent Consultant. 16366 Avenida Venusto Unit C, San Diego, CA, 92128, U.S.
Besma Hkiri: Department of Finance and Economics, College of Business, University of Jeddah, Jeddah, Saudi Arabia
Omar Rojas: Universidad Panamericana, Facultad de Ciencias Económicas y Empresariales, Álvaro del Portillo 49, Zapopan, Jalisco, 45010, Mexico

No 202060, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we analyze time-varying causality between the dollar-pound exchange rate and S&P 500 returns over the monthly period of September, 1791 to September, 2019. Based on a Dynamic Conditional Correlation-Multivariate Generalised Autoregressive Conditional Heteroskedasticity (DCC-MGARCH) framework, we find that evidence of unidirectional causality between the two returns is in general weak, and primarily restricted to the period following the breakdown of the Bretton Woods agreement. However, instantaneous spillover across the returns of these two markets is quite strong, which in turn tends to suggest the existence of nonsynchronous trading and also high-frequency causal dependency, with the latter confirmed based on daily data covering January 3rd, 1900 to October 4th, 2019. Moreover, the underlying DCC reveals that there is actually portfolio diversification opportunities for investors. Finally, an analysis of the second moments reveal much stronger evidence of volatility spillover between these two assets, when compared to the return linkages. This result has important implications from the perspective of policy making aiming to reduce the impact of uncertainty on the real economy.

Keywords: Time-varying Granger causality; currency and equity markets; returns and volatilities (search for similar items in EconPapers)
JEL-codes: C32 F31 F31 G10 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-06
New Economics Papers: this item is included in nep-ets and nep-his
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