Interactions between stock prices and exchange rates: An application of multivariate VAR-GARCH model

The study examined stock prices (SP) and exchange rate (ER) interactions with multivariate VAR-GARCH model using monthly data from January 2000 to October 2014. The results of the Engle and Granger and Johansen cointegration test show that there is stable long-term relationship between SP and ER. Th...

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Bibliographic Details
Published in:Cogent economics & finance 2019, Vol.7 (1), p.1-19
Main Authors: Manasseh, Charles O, Chukwu, Ndubuisi O, Abada, Felicia C, Ogbuabor, Jonathan Emenike, Lawal, Adedoyin Isola, Alio, Felix Chukwubuzo
Format: Article
Language:English
Subjects:
Bidirectionality
Diversification
Economic models
exchange rates
Foreign exchange
Foreign exchange markets
Foreign exchange rates
Hedging
Innovations
Interaction
multivariate
Prices
Securities markets
Stochastic models
Stock prices
VARr-GARCH
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Summary:The study examined stock prices (SP) and exchange rate (ER) interactions with multivariate VAR-GARCH model using monthly data from January 2000 to October 2014. The results of the Engle and Granger and Johansen cointegration test show that there is stable long-term relationship between SP and ER. The empirical evidence of the VAR-GARCH model shows a significant mean spillover running from stock market to exchange market but not a mean spillover from exchange market to stock market. The variance equation results indicated the existence of bidirectional volatility transmission effect between SP and ERs, indicating the past innovations in stock market have the great effect on future volatility in foreign exchange market, and vice versa. The results have important implications for international portfolio managers in the portfolio diversification decisions and risk hedging strategies.
ISSN:2332-2039
2332-2039
DOI:10.1080/23322039.2019.1681573