Testing for causality‐in‐variance: an application to the East Asian markets

Abstract

In this paper we provide some empirical evidence on the casual relationship between stock prices and exchange rates volatility in four East Asian countries. In order to test for causality-in-variance, we use a GARCH model for which a BEKK representation is adopted, and then test for the relevant zero restrictions on the conditional variance parameters. We find that in the pre-crisis sample stock prices lead exchange rates negatively in Japan and South Korea (consistently with the portfolio approach) and positively in Indonesia and Thailand. In the latter two countries after the onset of the 1997 East Asian crisis the spillover effects are found to be bidirectional.

Financial market interdependencies: A quantile regression analysis of volatility spillover

“…This methodology made success to capture interdependencies and spillover mechanisms either in bivariate or in multivariate system. It is worth mentioning that the majority of previous studies have led to the existence of unidirectional and sometimes bidirectional spillovers between international stock markets more amplified in times of financial crises and variant depending on the degree of integration (Gilenko and Fedorova, 2014;Bekiros, 2014;Arouri et al, 2011;Li, 2007;Choudhry, 2004;Darrat and Benkato, 2003;Xu and Fung, 2002;Caporale et al, 2002;Kasch-Haroutounian and Price, 2001;Rigobon, 2001, 2002).…”

Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate

“…Whether it is favorable or unfavorable depends on the entire industrial structure within a country. Studies emphasizing on the impact of the exchange rate on stock price for Taiwan can be found in Wu (1997), Guo and Wu (1998) and Chiao, Hung, and Nwanna (2001); whereas Choi, Hiraki, and Takezawa (1998), He and Ng (1998), Doukas, Hall, and Lang (1999), Caporale, Pittis, and Spagnolo (2002), Elyasiani and Mansur (2005) and Homma, Tsutsui, and Benzion (2005) among others, studied the relationship between the exchange rate and stock price of Japan.…”

The role of credit in the Great Moderation: A multivariate GARCH approach

“…We estimate a bivariate unrestricted BEKK model and conduct causality-in-variance tests following Caporale et al (2002). We observe unidirectional causality in variance from total output to mortgage lending before the Great Moderation, which is no longer detectable during the Great Moderation.…”

“…In the literature, testing for causality in variance has been based on the residual cross-correlation function (CCF), as in Cheung and Ng (1996), or by estimating of a multivariate GARCH framework, as in Caporale et al (2002). The methodology developed by Cheung and Ng (1996) (extended by Hong, 2001) is a two-step procedure where the estimation of univariate GARCH models is followed by computation of CCFs of squared standardized residuals.…”

“…Dijk et al (2005) suggest that the Cheung and Ng (1996) test could provide unreliable inference about the (non-) existence of causality in variance if structural changes have not been accounted for. 11 Caporale et al (2002) propose an alternative by estimating a multivariate GARCH framework and then testing for the relevant zero restrictions on the conditional variance parameters. By constraining sequentially the matrices A 11 and G 11 to be upper triangular and lower triangular, they allow for causality in either direction.…”