External Shocks and Volatility Overflow among the Exchange Rate of the Yen, Nikkei, TOPIX and Sectoral Stock Indices

Mirzosaid Sultonov

doi:10.3390/jrfm14110560

Abstract

In this paper, we examined the changes in volatility overflow among the exchange rate of the Japanese yen (JPY), the Nikkei Stock Average (Nikkei), the Tokyo Stock Price Index (TOPIX) and the TOPIX sectoral indices for the period of 10 February 2016 to 24 March 2017. We employed the exponential generalised autoregressive conditional heteroscedasticity (EGARCH) model, the cross-correlation function, and the daily logarithmic returns of JPY, Nikkei, TOPIX and the TOPIX components with a weight of 5% and more in estimations (banks, chemicals, electric appliances, information and communication, machinery and transportation equipment indices). The findings highlighted causality in variance (volatility spillover) among the variables. We revealed that volatility could also spread indirectly among the variables (from one variable to another through a third variable). We demonstrated how the impact of news about the results of the Brexit referendum (BR) and the United States presidential election (USE) in 2016 might spread among the variables indirectly within a week.

Highlights

Introduction of theYen, Nikkei, Tokyo Stock Price Index (TOPIX) andThe accelerated advancement of information and communication technologies in the last two decades has increased the size of the world stock and foreign exchange markets.The faster flow of information has made financial variables more volatile.Changes in both domestic and international political and economic environments affect investors’ expectations and the important variables of financial markets
Volatility overflow among financial variables makes selecting an appropriate financial portfolio difficult for investors and decision-making difficult for policymakers
In a subsequent paper (Sultonov 2020), we examined the effect of information about Brexit referendum (BR) and United States presidential election (USE) on the returns and volatility of the Japanese yen (JPY) and stock price indices (Nikkei and TOPIX), the asymmetry of the news effect on the volatility of the exchange rate and stock price indices, and the changes in causality in the mean and variance between the JPY

Summary

Methodological Framework

Logarithmic returns were arranged for use in the estimations. The unit root test and the Lagrange multiplier (LM) test for autoregressive conditional heteroscedasticity (ARCH) were conducted as pre-estimation tests to examine the appropriateness of the data for use in the model. The standardised residuals derived from the estimation of the model were used in the CCF to estimate the causality effect between the variables. The sample cross-correlation coefficient ρuv ( j) at lag i is estimated as puv (i ) = cuv (i )(cuu (0)cvv (0))−1/2. Are the sample variances of u and v, which are the squared standardised residuals derived from Equations (1) and (2) for any pair among the variables used in estimations. The squares of derived residuals standardised by conditional variances are constructed and used in CCF to test the null hypothesis that there is no causality in variance. By incorporating dummy variables for BR and USE into the EGARCH model, we determined the effects of both events on the volatility of the variables

Data Description

Levels

Empirical

Empirical Findings

Conclusions