International Transmission Effects of Volatility Spillovers Between Stock Returns and Exchange Rates: Evidence from Greece, Portugal and Spain since the Introduction of the Euro

Abstract

This paper investigates the nature of volatility spillovers between stock returns and exchange rate changes for Greece, Spain and Portugal for the 19992006 period after the introduction of the Euro as well as the 1999-2001 and 2002-2003/May and 2003/June-2006 periods since the Euro has been introduced. We use an EGARCH model which takes into account whether bad news has the same impact on volatility as good news. We also investigate whether volatility spillovers between exchange rates and equity markets is stronger for some currencies than others. We find that there were no significant volatility spillovers from stock returns to exchange rates for Greece prior the introduction of the Euro for the 1999-2001 time period while the coefficients are significant in the case of Portugal and Spain. However, since the introduction of the Euro, there were insignificant volatility spillovers from stock returns to exchange rates in all countries for all currencies, with the exception of Portugal in the more recent 2002-2006 period. The introduction of the Euro appears to have had little impact on the nature of volatility spillovers from exchange rates to stock returns which were generally insignificant prior to the introduction of the Euro as well as for the 1999-2006 period.