Volatility spillovers between stock returns and exchange rate changes: International evidence

In this paper, we have tested for volatility spillovers between stock returns and exchange rate changes for six countries, namely the US, the UK, Japan, Germany, Canada and France. Our findings can be summarised as follows. (a) Evidence of spillovers from stock returns to exchange rate changes is found for all countries except Germany. These results suggest that the asset approach to exchange rate determination is valid when formulated in terms of the second moments of the exchange rate distribution for these countries. (b) The spillovers from stock returns to exchange rate changes are symmetric in nature. (c) Volatility spillovers from exchange rate changes to stock returns are insignificant for all countries. The non-presence of spillovers from exchange rate changes to stock returns is in line with previous research which has focused on the first moments of the relevant distributions. (d) The correlation coefficient between the EGARCH filtered stock returns and exchange rate changes is negative and significant for all countries, indicating that there is a significant contemporaneous relationship between stock returns and exchange rate changes. (e) Volatility spillovers from stock returns spillovers to exchange rates have increased since the October 1987 crash, perhaps because financial markets have become more closely integrated during this period. © Blackwell Publishers Ltd. 2000.