Abstract
Abstract Background The purpose of this study is to examine volatility spillover effects between stock market and foreign exchange market in selected Asian countries; Pakistan, India, Sri Lanka, China, Hong Kong and Japan. This study considered daily data from 4th January, 1999 to 1st January, 2014. Methods This study opted EGARCH (Exponential Generalized Auto Regressive Conditional Heteroskedasticity) model for the purpose of analyzing asymmetric volatility spillover effects between stock and foreign exchange market. Results The EGARCH analyses reveal bidirectional asymmetric volatility spillover between stock market and foreign exchange market of Pakistan, China, Hong Kong and Sri Lanka. The results reveal unidirectional transmission of volatility from stock market to foreign exchange market of India. The analysis reveals no evidence of volatility transmission between the two markets in reference to Japan. Conclusions The result of this study provide valuable insights to economic policy makers for financial stability perspective and to investors regarding decision making in international portfolio and currency risk strategies.
Highlights
The purpose of this study is to examine volatility spillover effects between stock market and foreign exchange market in selected Asian countries; Pakistan, India, Sri Lanka, China, Hong Kong and Japan
The increasing interdependency has increased the volatility transmission betweens stock and foreign exchange market that has increased the international portfolio risk that is faced by investors, which has further lead to decrease the returns of investors portfolios (Kanas 2000)
The analyses reveal that Pakistan equity market represents mean daily return of 0.08 % that records the highest mean daily return while stock market of Japan represent mean daily return of 0.004 % that report lowest mean return among the selected equity markets
Summary
The purpose of this study is to examine volatility spillover effects between stock market and foreign exchange market in selected Asian countries; Pakistan, India, Sri Lanka, China, Hong Kong and Japan. The increasing trend in equity investment has lead to increase in high demand and supply of foreign currencies. The increasing interdependency has increased the volatility transmission betweens stock and foreign exchange market that has increased the international portfolio risk that is faced by investors, which has further lead to decrease the returns of investors portfolios (Kanas 2000). According to (Ebrahim 2000), it is important to know about how shocks are transmitted across financial markets (stock and currency market) and to explore the magnitude of their effects. This will further enhance the success of policies implemented by policy makers
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