Price and Volatility Spillovers between European Stock and Foreign Exchange Markets

Abstract

This paper investigates for the existence of price and volatility spillovers between European stock and foreign exchange markets. This is done using a multivariate extension of Nelson’s EGARCH (1991). Before specifying the model long-run (cointegration) relationships between these markets are also examined. Each multivariate model includes a local market (e.g. France or Germany), two regional markets (i.e. EMU and the U.K.) and a trade-weighted exchange rate. These issues are investigated during two sub-periods, the first is from 1/1/1999 to 3/23/2004 and the second is from 3/24/2004 to 6/12/2009. The results show that there have been extensive price and volatility spillovers between the investigated markets. Significant volatility spillovers are found in both directions between the local stock markets and the foreign exchange market. This is contrary to earlier studies that have found the relationships to be significant only in the direction from the stock markets to the foreign exchange market.