The Global Transmission of Volatility in the Foreign Exchange Market

Abstract

Abstract-Volatility spillovers of the DM/$ and ¥/$ exchange rate across regional markets are examined using the integrated volatility of highfrequency data. An analysis of quoting patterns reveals ve distinct regions: Asia, Asia-Europe overlap, Europe, Europe-America overlap, and America. After reviewing theoretical foundations for persistence of volatility in dealership markets, regional volatility models are constructed where volatility in one region is a function of yesterday's volatility in that region ("heat-wave effect") and volatility in other regions ("meteorshower effect"). Evidence of statistically signi cant effects is found for both own-region and interregional spillovers, but the economic signicance of own-region spillovers indicates that heat waves are more important than meteor showers.

Spillover effect in Asian financial markets: A VAR-structural GARCH analysis

“…By examining 12 transition economies, 152 CFRI 6,2 Gaston and Sahay (2000) state the spillover effect increased during the 1994-1999 period. Melvin and Melvin (2003) identified different sources of volatility spillovers. Baele (2005) investigated the volatility spillover effects from the USA and aggregated European stock markets into various individual European stock markets.…”

Volatility Transmission between US and Latin American Stock Markets: Testing the Decoupling Hypothesis

“…Interestingly, studies in stock markets have presented mixed results. For example, Fayyad & Daly (2011);Melvin & Melvin (2003) report that most of the volatility transmission occurs among markets of the same region, whereas Corradi, Distaso, & Fernandes (2012); Lee et al (2004) and Lin et al (1994) report strong interdependencies on distant markets. Koulakiotis et al (2009) in the time of the Asian Crisis (1997).…”

“…Early works based their tests on univariate volatility models (Lin et al, 1994;Christofi and Pericli, 1999;Melvin and Melvin 2003;Lee et al 2004;Abraham and Seyyed, 2006). Some other studies used bivariate switching volatility models (Edward and Susmel, 2001) or stochastic volatility models (Lopes and Migon, 2003;Weber, 2012).…”

Intra-Daily Volatility Spillovers between the US and German Stock Markets

“…Hamao, et al (1990) In order to analyze the short-term interdependence of the realized variances for the exchange rates of four European currencies against the US dollar, Bubák, et al (2011) propose a multivariate version of the heterogeneous autoregressive (HAR) model of Corsi (2009). Melvin and Melvin (2003) investigate volatility spillovers of the Deutsche mark-US dollar and yen-US dollar exchange rate across geographical market segments, while Dimpfl and Jung (2012) examine spillovers across the stock markets in Europe, the US and Japan. Both studies rely on structural vector autoregressive (VAR) models for the realized volatilities accounting for the time differences in trading hours of the markets under consideration.…”