Linkages and Volatility Spill-over between Stock markets and Foreign Exchange

markets

Exchange rate and stock price interactions in emerging financial markets: evidence on
India, Korea, Pakistan and Philippines
Abdalla and Murinde 1997, studied the interactions of exchange rate with stock prices in 4
emerging financial markets of India, Pakistan, Korea and Philippines. Bi-variate VAR model
along with other econometric tools like Granger causality, ECM and co-integration tests were
applied on monthly data collected from January 1985 to July 1994 on IFC Stock index and
effective real exchange rate. Results shows that exchange rate unidirectionally causes stock
prices in case of all countries except Philippines, where the findings are in contrast. Study
recommend the Govt officials to consider these result while designing exchange rate policies.
A Bivariate causality between Stock Prices and Exchange Rates: Evidence from Recent
Asian Flu
Granger et al. (2000), determined the Granger linkages between data collected during Asian
Flu on stock prices and exchange rates of Indonesia, Hongkong, Japan, Malaysia, South
Korea, Philippine, Singapore, Thailand and Taiwan, by applying the unit root and cointegration
models. Data on these variables ranging from January 3 1989 to June 16 1998 was taken
from DATASTREAM. Results of Impulse response shows that south Korean market follows
traditional approach of exchange rates leading stock prices, while Philippine confirming
portfolio approach of stock prices leading exchange rates. In case of Hong Kong, Singapore,
Malaysia, Taiwan and Thailand strong evidence of feedback relations were noticed, However
Indonesia and Japan no sign of any recognizable pattern were noticed.

Volatility spillover between stock returns and exchange rate changes: International
evidence
Kanas (2000), investigated the interdependence and volatility spillover linkages among
changes in exchange rate with return of stock prices within same economic setup . For
analysis sample on both the variables was taken from 6 major industrialized countries i.e US,
UK, Canada, Japan, France and Germany. Results confirms the asset approach to exchange
rate determination, due to spillover received by exchange rate changes from changes in stock
market in case of all countries except Germany. Moreover the nature of spillover was
symmetric. In addition spillover received by stock market from foreign exchange market was
insignificant for all sample countries. The negative sign of correlation between EGARCH stock
returns and exchange rate changes indicates the presence of significant contemporaneous
relationship. Furthermore since 1987 crash of stock markets, volatility Spillover have been
increased from stock returns to exchange rate.
Dynamic relationship between stock prices and Exchange rates for G-7 countries
Nieh and Lee (2001), explored the dynamic association between stock prices and exchange
rates of each G-7 countries. Engle-Granger two step model, Johansen cointegration maximum
likelihood mechanism, Vector error correction model were used to check the short as well as
long run co-movements between selected variables. Daily data on Stock market indices of all
these selected countries and their exchange rates ranging from October 1, 1993 to February
15, 1996 was taken from Dow jones News/Retrievals. Based on results this study rejects the
presence of significant relationship between exchange rates and stock prices. VECM results
exhibits that short -run relationship exist in case of few countries among G-7 except US.

Asymmetric Cross-Market volatility Spillovers: Evidence from daily data on equity and
foreign exchange markets
Apergis and Rizitis (2001), explored the cross-market spillover of volatility effects across
London and New York equity and foreign exchange markets. Using GARCH model on different
intraday and daily data sets it was found that equity markets of London and New York receives
volatility spillover effects from their respective foreign exchange markets. In contrast no
evidence of volatility spillover from equity market to foreign exchange markets of both the
countries was found, confirming Meteor shower effects.
Price and volatility spillover between stock prices and exchange rates: Empirical
evidence from the G-7 countries
Yang and Doong (2004), also examined the dynamics of mean and volatility spillover between
stock prices and foreign exchange markets of G-7 countries. Weekly data for stock indices
and exchange rates of these G-7 countries ranging from period 01/05/1989 to 01/01/1999 was
taken from Data-stream International and WEFA group respectively. Results of VAR,
Multivariate EGARCH, GJR-GARCH models reveals the presence of asymmetric volatility
spillover effects with movement in stock prices affecting future exchange rate movements.
Moreover, evidence of less direct effect of changes in exchange rates leading to changes in
stocks future movements were noticed.

Market integration and contagion: Evidence from Asian emerging stock and foreign
exchange markets
Tai (2007), investigated the contagion effects between foreign exchange and stock markets
for emerging Asian economies during 1997 financial crises. Results shows that foreign
exchange market of each country receives return shocks during crises period which are
originated from domestic stock market. These finding confirms that relation between these two
major financial markets is consistent with stock-oriented exchange rate models.
Dynamic linkages between exchange rates and stock prices: Evidence from east Asian
countries
Pan et al. (2007) explored the dynamic linkages between stock prices and exchange rates for
seven east Asian countries for the period January 1988 to October 1998. Results of the
empirical analysis of VAR model and subsequent test of Granger causality showed that there
exist causal relationship from exchange rates to stock prices for four out of 7 countries before
Asian crises. Results also exhibited the causal relation from equity prices to foreign exchange
market in case of Hong Kong, Korea and Singapore. During Asian Crises 1997, no signs of
causality from stock market to foreign exchange market and reverse causal relation i.e from
Foreign exchange market to stock market was noted for all countries excluding Malaysia. It
was concluded that linkages between these two categories of markets vary across economy
on the basis of Exchange rate regimes, the size of trade and equity market and the degree of
capital flows.

Effect of exchange rate volatility on the Ghana stock exchange

Adjasi et al. (2008), explored the interaction between and the impact of changes in exchange
rates on stock market in Ghana. EGARCH model was used for analyzing time series data on
exchange rate volatility and stock market volatility. Negative relation was found between stock
returns and exchange rate volatility, implying that when local currency depreciates, it leads to
increase in stock returns in long run. However in short run it leads to decreasing stock market
returns.

Modeling the interactions of stock prices and exchange rate in Malaysia

Ismail and Isa (2009), analyzed the Non-linear association between stock prices and
exchange rate in Malaysian setup. Two regime Markov-switching Multivariate VAR model was
run on data collected. Data on Kuala Lumpur composite index and Malaysian Ringgit against
BP, JY, SD and AUD from January 1990 to December 2005 was taken from Bursa Malaysia
and www.x-rate.com respectively. The estimated model reveals that exchange rate depreciate
with fall in stock price index and vice versa.
Volatility spillovers between the equity market and foreign exchange market in South
Africa
Bonga and Hoveni (2011), assessed the volatility spillover effects between equity markets and
foreign currency market in case of south African countries. Using multi-steps GARCH family
models on weekly data from July 1, 1995 to October 31 2010 they found unidirectional volatility
spillover from stock market to foreign exchange market.
Volatility transmission and asymmetric linkages between the stock and foreign
exchange markets: A sectoral analysis
Fu et al. (2011), investigated transmission of volatility spillover between Japanese stock
markets and foreign exchange markets. Tri-variate BEKK-GARCH model was applied to
industry/sectoral level daily data on these variables for the period 1994-2007. Results of
analysis suggest that majority of the sector i.e 8 out of 10, received volatility transmission from
shock in Japanese currency market. in addition in half of the sectors significant evidence of
asymmetric effects were noted.

Volatility transmission and Asymmetric linkages between the stock and foreign
exchange markets: A sectoral analysis
Fu et al. (2011), analyzed the transmission of volatility spillover between foreign exchange
and stock markets of Japan. Sectoral level daily data from period 1994-2007 was analyzed
through BEKK-GARCH model. Majority of the sectors were receiving volatility transmission
from news shock experienced by Japanese currency market. Moreover, Half of the industries
i.e 5 out of 10 reveals evidence of significant asymmetric effects. Asymmetric effects
characterize that as stock prices falls in 5 sectors a larger response in Japanese currency
market was noted and as prices increases a smaller impact was seen.
The relationship between Stock price index and exchange rate in Asian markets: A
quantile regression Approach
Tsai (2012), estimated the relationship between Exchange rates and Stock price indexes of
six Asian countries, Singapore, Thailand, Malaysia, Philippine, South Korea and Taiwan.
Monthly data on stock indices and Exchange rates of these countries from January 1992 to
December 2009 was used in analysis. Due to unfavorable results given by Ordinary Least
Square Model, Quantile regression model was employed to analyze the considered
phenomenon. Results confirm the Portfolio Balance approach i.e Increase in return of stock
price index will decrease exchange rate which lead to depreciation of domestic currency and
vice versa. However, this negative relationship between stock indices and exchange rates
become more obvious when it comes to extremely low or High exchange rates.

The co-movement between Exchange rates and Stock Prices in the Asian emerging
Markets
Lin (2012), examined the co-movement between Stock prices and exchange rates in Emerging
markets of Asia. Main focus was to study that how nature of short and long term relationships
changes during institutional changes like financial crises and market liberalization. ARDL
based model was used due to its capacity of dealing structural breaks and handling series
integration of various orders. Results suggest that concerned co-movement between these
two variables become much stronger when it comes to crises and panics which is consistent
with contagion of spillover effects. Furthermore channel of spillover from stock prices to
exchange rate was observed during crises period. Study suggest that Government should
work on stimulating economic growth and developing stock market in order to attract capital
inflows which will work out to prevent a currency crises. Industry causality analysis shows that
in case of industries which are export oriented the co-movement is not that stronger for all
periods which further implies that this kind of relation is driven by capital account rather than
trade account.

Re-examining the relationship between stock prices and exchange rates in ASEAN-5
using Panel granger causality approach
Liang et al. (2013), revisited the relationship between stock and foreign exchange markets of
in ASEAN-5 countries. Panel Granger causality and panel DOLS models were used for
analyzing monthly data on these variables from August 2008 to June 2011. Results of these
analysis confirmed that stock prices receives effects from exchange rates and is effected
negatively, hence confirming stock-oriented approach. Result of Panel causality tests
demonstrates that exchange rates causes stock prices Uni-directionally in these countries.
Dynamic interactions between Egyptian equity and Currency markets prior to and
during political unrest
Ahmad (2014), evaluated the nature and presence of interdependencies between Egyptian
currency and equity markets pro and during political uprising of 2011. Results of Bivariate
EGARCH model indicates that before 2011 uprising the mean spillover between these two
market was reciprocal. However during uprising unidirectional mean spillover from equity to
currency market was noted. Furthermore during both the periods unidirectional and
asymmetric volatility spillover from equity market to currency market was detected. Overall
results support portfolio balance approach.
Exploring the inter-relationship between the volatilities of exchange rate and stock
returns
Lim and Sek (2014), empirically analyzed the inter-relationship between volatility of stock
market returns and exchange rate in 4 emerging Asian countries of Indonesia, Korea, Thailand
and Philippine. The basis for selecting these countries was a drastic switch of their Exchange
rate regime from very rigid to flexible exchange rate system after 1997 financial crises. Various
GARCH family and VAR models were applied on monthly data from January 1990 to
December 2012 on stock market indices and nominal exchange rates of the selected
countries. Result exhibited that in case of Indonesia, Korea and Thailand, volatility of
exchange rate and stock market returns are significantly and Bi-directionally related to one
another.
Volatility transmission across Currencies and stock markets: GIIPS in crises
Andrikopoulos et al (2014), studied the structure of the volatility transmission mechanism
between currency and stock markets for Eurozone economies; Greece , Portugal, Italy, Ireland
and Spain. The main focus of the study was to explore and understand the structural
properties of Volatility diffusion in period of Market uncertainties, Illiquidity, instabilities,
Financial crises and political turmoil. Daily data starting from August 9 2007 till July 28 2011
on representative stock indices of GIIPS countries and their foreign exchange rates was
collected from Thomson Reuters Data-stream. Employing EGARCH (p,q) Model developed
by Nelson (1991), Results shows the indication of bidirectional and asymmetric volatility
spillovers between the considered markets. It was concluded that shock in asset returns of
the stock markets bears significant influences on return of currency market.

Dynamic linkages between real exchange rates and stock prices: Evidence from
Developed and emerging Asian Markets
Moore and Wang (2014), analyzed the sources and nature of dynamic relationship between
differentials of stock market returns and real exchange rates with respect to US market for
developed as well emerging markets of Asia. Dynamic conditional correlation was estimated
and regressed on differentials of interest rate and trade balance. For emerging Asian markets
the trade balance and for developed markets the interest rate differentials were noted to be
the main driving forces.
Time-Frequency relationship between Share prices and Exchange rates in India:
Evidence from continuous wavelets
Tiwari et al. (2015), Studied the causal relationship between return series of stock prices and
exchange rates using wavelet based approach in Indian context. Employing monthly data on
exchange rates and share prices from April 1993 to February 2009 taken from Reserve bank
of India and International financial statistics respectively, unidirectional as well as reverse of
bidirectional causality was found between the two time series. Some evidences of cyclical as
well as anti-cyclical relationships were also found. It was concluded that share prices lag
exchange rates and receive cyclical effects as well.

Bidirectional volatility spillover effect between the exchange rate and stocks in the
presence of structural breaks in selected Eastern European Economies
Zivkov et al. (2015), Assuming the presence of multiple structural breaks analyzed the second
moment volatility spillover effects between changes in exchange rate and stock returns in both
directions in four eastern European emerging economies. Two- step Symmetric/Asymmetric
Fractionally Integrated GARCH model was used for analyzing daily data. Bidirectional spillover
was noted. However, Results suggest that spillover from exchange market towards stock
market is time varying and much stronger in effects than that from stock towards foreign
exchange. The consideration of structural breaks in applied model suggest that without
considering these breaks spillover effect might be biased and overestimated in all asset
markets.
Dynamic linkages among oil price, gold price, exchange rate, and stock market in India
Jain and Baswall (2016), investigated the dynamic contemporaneous linkages among oil
prices, gold prices, exchange rate and stock market. These linkages were analyzed through
DCC-GARCH framework developed by Engle (2009) and nonlinear non causality tests were
used to study the lead lag relationship among these variables. Daily data for 10 years from
2006-2015 was collected from Bloomberg website. Dynamic conditional correlation- GARCH
is being employed in order to study the time varying correlation and nonlinear causality/ lead-
lag relationship between two or more series. From empirical results it was concluded that fall
in gold prices and crude oil prices causes the value of Indian rupee to fall which further exerts
downward pressure on Indian stock market and the market shows a downward movement.

Stock returns and exchange rate nexus in Ghana: A Bayesian quantile regression
approach
Baoko et al. (2016), analyzed the dependence structure and relationship between exchange
rates and stock returns in Ghana. Using multiple causality tests and Bayesian quantile
regression approach on periodical daily data from January 2011 to December 2014, high
dependence of stock market on foreign exchange market was noted. Moreover this
dependence does support International trade model rather than portfolio balance approach.
Study also documented the instantaneous effect of cedi-dollar on equity market.
Volatility spillovers and determinants of contagion: Exchange rate and equity markets
during crises
Leung et al. (2017), studied the volatility spillover between stock markets of London, Tokyo
and New York with their respective exchange rates GB pound, EURO, US dollar and JP yen
on an hourly basis for the time period covering a duration 2001 to 2013. This period covers
non-crises as well both the financial crises of 2008 and Euro debt crises. Results of the well-
known GARCH model revealed that spillover between equity market and foreign exchange
market increased during the crises period. The authors concluded that increased spillover
between London and Tokyo equity markets to New York Equity market during financial crises
of 2008 as well as from exchange rate market to New York equity market during Euro debt
crises are explained by pure contagion and Fundamental contagion effects.

Real Exchange rate returns and Real Stock price returns

Wong (2017), studied the associations between returns of the real exchange rate and returns
of the real stock prices between 7 economies categorized into developing, newly industrialized
and developed economies, 5 Asian and 2 European. Results of the Constant and dynamic
conditional correlational Multivariate GARCH models and Granger causality tests reveals that
in case of Singapore, Korea, Malaysia and UK the real exchange rate is significantly negatively
related and insignificantly related in context of Philippine, Germany and Japan. Study
concludes that exchange rate markets generally influences stock market.
Exchange rate dynamics and stock prices in small open Economies: Evidence from
Asia-Pacific countries
Yang (2017), examined the short and Long-run linkages between Stock market and Exchange
rates in a manner to consider the impact of Monetary Policy on these categories of market as
well in four small but open Asia- Pacific economies named Singapore, Hong Kong, Taiwan
and South Korea. Monthly Data was collected from January 1999 to December 2016. From
results it was found that stock prices of all the four countries were effected contemporaneously
from monetary policy. Furthermore stock market of Singapore and Hong Kong receives less
Short run volatility from exchange rate shocks. It was concluded that shocks in exchange rate
induces an instantaneous change in stock prices but exchange rate gradually varies with
shocks in stock prices of the above considered economies.
The multiscale impact of exchange rates on the oil-stock nexus: Evidence
from China and Russia
Shupei et al. (2017), examined the relationship between effective exchange rate and oil-stock
nexus in a dynamic manner. Unlike previous studies which used oil prices measured in USD,
the impact of real oil prices quoted in corresponding currency on the stock market of Russia
and China by involving Nominal exchange rates through various time horizons was explored.
Monthly data from January 2000 to October 2015 was analyzed through wavelet transform,
VAR model and Gray correlational analysis. Results shows that the response of Russian stock
market to the combine influence of oil prices and exchange rates was much stronger than that
of Chinese stock market. The study infers that the response of stock prices to oil prices as
shown by granger causality was weaken by exchange rate in Chinese context while in Russian
context it was strengthen. Furthermore the results of dynamic analysis shows that correlation
between oil-stock nexus and effective exchange rates is high, however it decreases after 2014
when the effective exchange rates of China and Russia moves in opposite direction in the long
run.

Returns effect, shocks and volatility transmission between foreign exchange-stock

market in Nigeria
Adi (2017), studied different dynamics between equity and foreign exchange markets of
Nigeria like effect of past return on current returns, Volatility transmission and shock spillover
between these markets. Bivariate GARCH framework like VAR-GARCH and VAR-AGARCH
models were used. Evidence of predictability in short run were revealed in both of the markets.
Current period returns in both the markets were seems to be effected significantly from one
period lagged returns. Impact of the said relationship was more stronger in case of FX market.
regarding volatility spillover and shock spillovers bidirectional relationship volatility
transmission in both the markets, however unidirectional shock spillover from equity to FX
market was noted. Results also exhibited that bad news effect volatility more than good news.
Asymmetric Volatility transmission between the real exchange Rate and stock returns
in South Africa
Sikhosana and Aye (2018), investigated the transmission of asymmetric volatility spillover
between stock market returns and real exchange rate in South African context. A number of
models like Multivariate-EGARCH and Asymmetric GARCH models i.e GJR GARCH and
APARCH were estimated on data collected from period 1996 to 2016. Results of these models
shows that in Asymmetric short run Bi-directional spillover effect exist between two sets of
markets. It was concluded from the said study that these financial assets should not be
combined in the same portfolio if diversification of risk is the objective as information in on
market is used to forecast changes in other market.
Real exchange rate return and real stock prices returns: An investigation on the stock
market of Malaysia
Tsen et al. (2018), studied the interaction between real stock price returns of the Malaysian
stock market and real return of the Malaysian currency. Stock prices covers Overall real stock
prices and individual stocks of shariah compliant securities. Results of analysis from CCC-
MGARCH model that real returns from overall stock prices and exchange rate market are
significantly negatively correlated. Furthermore real returns of half of the individuals stock from
shariah compliant stocks are also significantly negatively correlated. Moreover granger
causality shows the absence of causality effects between conditional variance of real
exchange rate returns and overall stock price returns. However little evidence of causality was
noted for shariah compliant stock with exchange rate returns.
The relationship between oil prices, the stock market and the
exchange rate: Evidence from Mexico
Delgado et al, (2018) studied the interaction between exchange rate, oil price, and stock
market in a Mexican setup. Monthly data from January 1992 to June 2017 was collected on
these variables. As evident from cointegration tests that the above considered variables were
not integrated therefor a Vector Autoregressive model was employed. Results showed the
negative and significant effects of exchange rate on Stock index. It was concluded that stock
market moves upward with an appreciation in Mexican peso against US dollar; meaning that
when domestic currency gets strengthen stock market activity increases. Results of the
analysis also confirms positive impact of Exchange rate on CPI. It was also noted that Oil
prices has a negative and statistically significant relation to exchange rate. It shows that with
appreciation in oil prices, Mexican peso gets strengthen. The results of Impulse response
function confirms and further shows that these phenomenon tends to vanish over time.

Volatility of stock market returns and the Naira Exchange rate

Tule et al. (2018), explored the volatility spillover between exchange rate and return series of
the stock market due to the speculative pressure of trading by foreign equity investors. For
modeling the transmission mechanism Return spillover, shock spillover and mean return
between stock and foreign exchange markets a multivariate VERMA-GARCH model was
used. Results showed the presence of the transmission mechanism. Furthermore, it was noted
that Shock spillover exhibited stronger Uni-directional transmission of shocks from stock
market to the foreign exchange markets. After considering breakpoints, bi-directional
transmission of spillover was observed. It was concluded that when capital flows on a short
term basis into emerging markets affect the equilibrium of the foreign exchange market in long
run.
Return and volatility linkages among International crude oil price, gold
price, exchange rate and stock markets: Evidence from Mexico
Singhal et al. (2019) analyzed the Dynamics connections between Gold and Oil Prices with
Stock Market index and exchange rate of Mexico. Running ARDL bound testing cointegration
approach on daily data from January 2006 to April 2018 gathered from Bloomberg Terminal it
was found that International crude oil prices have negative while Gold prices have positive
effects on Mexican stock market indices. Exchange rate was negatively affected by oil prices.
No effect of Gold prices on exchange rate was found.
Predicting volatility and dynamic relation between stock market, exchange rate and
select commodities
Saif and Preeti, (2019) first determined the return and volatility spillover between crude oil,
exchange rate, gold prices and stock prices in emerging economy of India and then studied
the time-varying conditional correlation. Daily secondary data from April 01 2014 to March 28
2018 was used. For estimating return and volatility spillover VERMA-BECK-GARCH model is
used. For investigating asymmetric correlation and asymmetric volatility DCC-GJR-GARCH
and ADCC-GJR-GARCH models were estimated respectively.

Interdependence between Stocks and Exchange rate in East Asia- A Wavelet-based

Approach
Zivkov et al. (2019) put forward their efforts to analyze the short and long run dynamic co-
movements and lead-lag relationship between these major financial assets in selected east
Asian Countries like Japan, Thailand, South Korea and Indonesia. Various Wavelet technique
like wavelet correlation, wavelet coherence, and wavelet cross correlation are used for
analysis. Daily data from January 1 2001 to November 30 2018 on spot closing prices of
currencies and their corresponding stock indices was analyzed. Results of wavelet correlation
reveals that in case of three emerging east Asian markets the Portfolio balance approach i.e
capital mobility mechanism hold true because of the dominance of negative correlation across
the wavelet scales. Furthermore for Japanese markets the presence of Positive correlation
across different scales confirms the Flow-oriented approach i.e Current account operations.
Result of WTC are in line with that of WT Correlation. However WT Cross-correlation negates
the presence of lead-lag relationship.
Nonlinear bidirectional multiscale volatility transmission effect between stocks and
exchange rate markets in the selected African countries
Zivkov et al (2020), examined the multiscale Bidirectional effects of volatility spillover between
four African stock markets and foreign exchange markets. Three step methodology of
Wavelet signal-decomposing methodology, Markov switching GARCH model and Quantile
regression approach were used for analysis. Daily closing prices data on stock market indices
and corresponding exchange rates of the selected four African countries from January 2005
to December 2019 was used for analysis. Results reveal the presence of bidirectional “meteor
shower” at a relatively modest rate. Moreover it was also noted that volatility impact from
exchange rate market to stock market was more stronger except one country i.e Nigeria than
vice versa.
Volatility Spill-overs between Major International Financial
Markets During the COVID-19 Pandemic
Wang et al (2020) analyzed the dynamic changes in volatility spillovers among major
international financial markets during ongoing global Covid-19 pandemic. Using Diebold and
Yilmaz’s connectedness index they found that total volatility spillover first time reached its
highest level in recent ten years, followed by the worst stages of pandemic. From analysis it
was found that US and UK’s stock markets are major transmitters of volatility spillovers while
Japanese and Chinese stock markets as well as GBP/USD exchange rate markets are
recipients of volatility spillover. The pairwise spillover between US and UK is larger as
compared to other pairs of markets. Exchange rate and crude oil market received spillovers
mainly from American stock market. In short severe impact of volatility shocks was noted
during Covid-19 pandemic and this impact was more prominent in those markets which belong
to countries in which the disease was in severe conditions.