Impact of stock market trading on currency market volatility spillovers

This research aims to detect the volatility linkages among various currencies during operating and non-operating hours of three major stock markets (Tokyo, London and New York) by employing bivariate VAR-BEKK-GARCH model in selected currency pairs. In particular, the aim is to analyze whether the major stock markets have a differential impact on volatility linkages in currency markets. The results indicate that volatility linkages in intraday are far stronger then in daily results. One remarkable result is that rather than major currencies, some minor and exotic currencies play a leading role in volatility transmission during trading hours of major stock markets.     

Asymmetric volatility spillovers between economic policy uncertainty and stock markets: Evidence from China

This study explores the spillovers between economic policy uncertainty (EPU) and stock market realized volatility (RV). The monthly index of Chinese and US EPU and RV are used to analyze the pairwise directional spillovers. We find that RV is a net receiver that is more vulnerable to shocks from U.S. EPU than to shocks from Chinese EPU. We further decompose the RV into good and bad volatility to test the asymmetric spillover effect between the stock market and EPU. The results suggest that EPU has a bigger effect on bad volatility in the stock market throughout most of the sample period. However, we find that good volatility spillovers become larger during periods of stimulated reform, whereas bad volatility spillovers become larger during periods of international disputes. We show that Chinese stock market volatility is sensitive to both U.S. and Chinese EPU and that the spillover is asymmetric in different periods.     

Price and volatility spillovers between exchange rates and stock indexes for the pre- and post-euro period

In this paper we explore the nature of the mean, volatility and causality transmission mechanism between stock and foreign exchange markets for the United States and some major European markets for the periods pre- and post-euro. The asymmetric volatility transmission is described by an extended Multivariate Exponential Generalized Autoregressive Conditionally Heteroskedastic (EGARCH) model. The results support the asymmetric and long-range persistence volatility spillover effect and show strong evidence of causality in the mean and variance between foreign exchange rate and stock price for both pre- and post-euro periods. However, the stock price has a more significant effect on foreign exchange rate for the two subsamples. These results are robust to the cross-correlation function test suggested by Cheung and Ng. The implication is particularly important for international portfolio managers when devising hedging and diversification strategies for their portfolios.     

Conditional volatility persistence and volatility spillovers in the foreign exchange market

I investigate the magnitudes and determinants of volatility spillovers in the foreign exchange (FX) market, using realized measures of volatility and heterogeneous autoregressive (HAR) models. I confirm both meteor shower effects (i.e., inter-regional volatility spillovers) and heat wave effects (i.e., intra-regional volatility spillovers) in the FX market. Furthermore, I find that conditional volatility persistence is the dominant channel linking the changing market states of each region to future volatility and its spillovers. Market state variables contribute to more than half of the explanatory power in predicting conditional volatility persistence, with the model that calibrates volatility persistence and spillovers conditionally on market states performing statistically and economically better. The utilization of market state variables significantly extends our understanding of the economic mechanisms of volatility persistence and spillovers and sheds new light on econometric techniques for volatility modeling and forecasting.     

R&D, knowledge spillovers and stock volatility

Firms improve their know‐how not only by innovations (producing new knowledge), but also by knowledge spillovers (learning from others). The objective of this study is to test for two major hypotheses developed from a theoretical model explaining the relationship between R&D, knowledge spillovers and stock volatility. Analytically, the model suggests that asymmetric information caused by R&D activities with uncertain future output increases stock volatility, even though dividends and consumptions remain unchanged. However, interfirm knowledge spillovers have a negative impact on stock volatility by reducing the degree of asymmetric information. Both hypotheses are supported by empirical evidence from this study.     

Dynamic spillovers between commodity and currency markets

In this study, we examine the dynamic link between returns and volatility of commodities and currency markets. Based on weekly data over the period from January 6, 1987 to July 22, 2014, we find the following empirical regularities. First, our results suggest that the information contents of gold, silver, platinum, and the CHF/USD and GBP/USD exchange rates can help improve forecast accuracy of returns and volatilities of palladium, crude oil and the EUR/CHF and GBP/USD exchange rates. Second, gold (CHF/USD) is the dominant commodity (currency) transmitter of return and volatility spillovers to the remaining assets in our model. Third, the analysis of dynamic spillovers shows time- and event-specific patterns. For instance, the dynamic spillover effects originating in gold and silver (platinum) returns and volatility intensified (degraded) in the period marked by the global financial crisis. After the global financial crisis, the net transmitting role of gold and silver (platinum) returns shocks weakened (strengthened), while the net transmitting role of gold, silver and platinum volatility shocks remained relatively high. Overall, our findings reveal that, while the static analysis clearly classifies the aforementioned variables into net transmitters and net receivers, the dynamic analysis denotes episodes wherein the role of transmitters and receivers of return (volatility) spillovers can be interrupted or even reversed. Hence, even if certain commonalities prevail in each identified category of commodities, such commonalities are time- and event-dependent.     

Asymmetric volatility in the foreign exchange markets

We examine the presence or absence of asymmetric volatility in the exchange rates of Australian dollar (AUD), Euro (EUR), British pound (GBP) and Japanese yen (JPY), all against US dollar. Our investigation is based on a variant of the heterogeneous autoregressive realized volatility model, using daily realized variance and return series from 1996 to 2004. We find that a depreciation against USD leads to significantly greater volatility than an appreciation for AUD and GBP, whereas the opposite is true for JPY. Relative to volatility on days following a positive one-standard-deviation return, volatility on days following a negative one-standard-deviation return is higher by 6.6% for AUD, 6.1% for GBP, and 21.2% for JPY. The realized volatility of EUR appears to be symmetric. These results are robust to the removal of jump component from realized volatility and the sub-samplings defined by structural-changes. The asymmetry in AUD, GBP and JPY appears to be embedded in the continuous component of realized volatility rather than the jump component.     

Exchange-rate volatility and industry trade between the U.S. and Malaysia

Previous research that investigated the impact of exchange rate volatility on the trade flows of Malaysia concentrated only on the aggregate exports of Malaysia to the rest of the world. In this paper we first concentrate on the trade flows between Malaysia and the U.S. After showing that exchange rate volatility has neither short-run nor long-run effect on the trade flows between the two countries, we disaggregate the trade data by industry and consider the experience of 101 U.S. exporting industries to Malaysia and 17 U.S. importing industries from Malaysia. While exchange rate volatility seems to have significant short-run effects on the trade flows of most industries, short-run effects translate into the long run only in a limited number of small industries.     

美元和日元外国债券市场与离岸债券市场比较研究

债券市场对外开放,对于促进人民币跨境使用具有重要意义。文章通过对美元和日元外国债券市场和离岸债券市场的比较研究,发现由于管制落差的存在,离岸债券市场发展明显快于外国债券市场,同时,离岸债券市场发展对在岸的外国债券市场发展具有明显的促进作用。文章指出,应通过减少对在岸外国债券市场的管制、有效利用香港等离岸人民币债券市场的创新优势等手段,进一步促进我国债券市场的对外开放效率和健康发展。     

Exchange traded currency derivatives markets in India: the road ahead

Indian exchanges have recently been permitted to offer currency futures on their platforms to the market participants. The paper outlines the contract, and charts the development and growth of currency futures in India since their inception in 2008. It emphasizes the existing close connectivity between commodity and currency markets. It highlights the increased exchange rate volatility of Indian exchange rate against US dollar (INRUSD) during conventional and non conventional trading hours and argues for the ability of the market to quickly adapt to extended trading hours. The paper recommends some new products and an alternative mechanism to settle the contracts.     

Testing for volatility spillover between the British pound and the euro

This paper examines volatility spillover between two nominal U.S. dollar exchange rates: the British pound and the euro. Using the residual cross-correlation approach, we observe that the euro Granger-causes the British pound in variance, whereas the British pound does not Granger-cause the euro in variance. Our findings support unidirectional volatility spillover from the euro to the British pound; thus, the euro volatility has a one-sided impact on the British pound volatility. Moreover, the findings suggest that euro traders succeed in the efficient processing of information derived from the British pound.     

Intra- and inter-regional spillovers between emerging capital markets around the world

In this paper, returns and volatility spillovers between emerging capital markets of Central and Eastern Europe, Latin America, and South-East Asia are investigated. We distinguish between spillovers from countries located in one region (intra-regional) and in different regions (inter-regional) after controlling for shocks originating at home and on the global market. Both intra- and inter-regional spillovers are significant, with the former being more pronounced than the latter. Our findings indicate that linkages between emerging markets are not solely due to their common dependence on the global capital market and highlight the importance of common factors in intra-regional interdependencies.     

Financial crises and the dynamics of the spillovers between the U.S. and BRICS stock markets

We examine the spillover dynamics between the U.S. and BRICS stock markets using the multivariate DECO-GJR-GARCH model and spillover index method. We identify time variations in volatility equicorrelation and significant dynamic spillovers between these stock markets, as well as an increased impact of uncertainty on spillovers. Spillovers between markets intensify after the inception of the global financial crisis and subsequent European sovereign debt crisis. We also find, following the commencement of the crisis periods, that the U.S., Brazilian, and Chinese markets are net volatility transmitters, whereas the Russian, Indian, and South African markets are net recipients. These results shed new light on the information transmission channels between the U.S. and BRICS stock markets.     

Forecasting implied volatility in foreign exchange markets: a functional time series approach

We utilise novel functional time series (FTS) techniques to characterise and forecast implied volatility in foreign exchange markets. In particular, we examine the daily implied volatility curves of FX options, namely; Euro/United States Dollar, Euro/British Pound, and Euro/Japanese Yen. The FTS model is shown to produce both realistic and plausible implied volatility shapes that closely match empirical data during the volatile 2006–2013 period. Furthermore, the FTS model significantly outperforms implied volatility forecasts produced by traditionally employed parametric models. The evaluation is performed under both in-sample and out-of-sample testing frameworks with our findings shown to be robust across various currencies, moneyness segments, contract maturities, forecasting horizons, and out-of-sample window lengths. The economic significance of the results is highlighted through the implementation of a simple trading strategy.     

The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth

Reduced exchange rate volatility and higher and less heterogeneous quality of institutional rules and macroeconomic policies are two of the main (anticipated and concurring) effects expected from a currency union.In this paper, we measure the magnitude of these two effects for the Eurozone countries looking at real effective exchange rates (REER) and at different indicators of quality of institutional rules and macroeconomic policies (QIRMP). We find that the first effect is much stronger than the second when we compare relative changes for Eurozone countries and the rest of the world in the relevant period.We further evaluate the impact of both effects on economic growth on a larger sample of countries. Our findings show that both have significant impact on levels (more robust) and on rates of growth (weaker) of per capita GDP.     

Dynamic information spillovers in intraregionally-focused spot and forward currency markets

This paper proposes an intraregionally-focused tri-currency modeling framework to investigate dynamic information spillovers across spot and forward exchange rate markets in frontier and emerging country currencies, for both price levels and volatilities. Empirical estimates of structural parameters were obtained using an MGARCH–MSKST model that incorporated the term structure of non-deliverable forward (NDF) and deliverable forward (DF) markets, the dominance of regional currencies, and the influence of differing forward contract maturities (1-, 3-, 6- and 12-months). The currencies for nine countries were grouped into three regions: Northeast Asia (China, Korea and Taiwan); South/Southeast Asia (India, Indonesia and Philippines); and Latin America (Brazil, Chile and Columbia). The currency for each selected country was evaluated within the regionally determined tri-currency system. We found that NDF markets play a dominant role over DF markets with regard to price discovery during periods of tranquility. During periods of crisis, both NDF and DF markets exhibit a more balanced impact on currency market price discovery mechanisms. In addition, distinct differences were observed across regions: currencies in Northeast Asia were shown to be affected by the Chinese renminbi during periods of crisis and the Indian rupee could be regarded as the dominant currency in South/Southeast Asia. No robust results were obtained with regard to the dominance of currencies in Latin America. Finally, our results also suggest important distinctions between the effect of various instrument maturities on NDF and DF market returns – with DF returns being more responsive to longer maturities (6-months and 12-months). During tranquil periods NDF returns are more responsive to shorter maturities, but during crisis periods this effect is diminished.     

The role of time‐varying rare disaster risks in predicting bond returns and volatility

This paper aims to provide empirical evidence to the theoretical claim that rare disaster risks affect government bond market movements. Using a nonparametric quantiles‐based methodology, we show that rare disaster‐risks affect only volatility, but not returns, of 10‐year government bond of the United States over the monthly period of 1918:01 to 2013:12. In addition, the predictability of volatility holds for the majority of the conditional distribution of the volatility, with the exception of the extreme ends. Moreover, in general, similar results are also obtained for long‐term government bonds of an alternative developed country (UK) and an emerging market (South Africa).     

Foreign participation in local currency bond markets

Countries that cannot attract foreigners to invest in their local currency bonds run the risk of currency mismatches that can result in painful crises. We analyze foreign participation in the bond markets of over 40 countries. Bond markets in less developed countries have returns characterized by high variance and negative skewness, factors that we show are eschewed by U.S. investors. While results based on a three-moment CAPM indicate that it is diversifiable idiosyncratic risk that U.S. investors shun, our analysis suggests that countries can improve foreign participation by reducing macroeconomic instability.     

Volatility spillovers and dynamic correlation in European bond markets

This paper examines the dynamic linkages among the European bond markets. We model the price and volatility spillovers from the US bond market and the aggregate Euro area bond market to twelve individual European bond markets using an EGARCH model that allows for a dynamic correlation structure. Our results suggest that significant volatility spillovers exist from both the aggregate Euro area bond market and the US bond market to the individual European markets. Moreover, the introduction of the Euro has strengthened the volatility spillover effects and the cross-correlations for most European bond markets.     

Exchange rate returns and volatility: the role of time-varying rare disaster risks

This paper provides empirical evidence to the theoretical claim that rare disaster risks have predictability for exchange rate returns and volatility using a nonparametric quantile-based methodology. Using dollar-based exchange rates for Brazil, Russia, India, China, and South Africa, the quantile-causality test shows that indeed rare disaster-risks affects both returns and volatility over the majority of their respective conditional distributions. In addition, these effects are much stronger when compared to those using the British pound, especially in terms of currency returns.