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Volume 65, Issue 6

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Bidirectional Volatility Spillover Effect between the Exchange Rate and Stocks in the Presence of Structural Breaks in Selected Eastern European Economies

Milenkovic, Ivan; Njegic, Jovan; Živkov, Dejan

Year: 2015   Volume: 65   Issue: 6   Pages: 477-498

Abstract: This paper investigates the second moment spillover effect between stock returns and exchange rate changes in both directions in four Eastern European emerging markets, assuming the presence of multiple structural breaks. The data sample consists of daily observations and the methodology is based on a two-step symmetric/asymmetric fractionally integrated generalized autoregressive conditional heteroskedasticity approach, with a rolling technique and structural breaks integration. The results indicate that the spillover effect has a much greater impact when spillover is from the exchange rate market toward the stock market than in the opposite case and it is time-varying. The inclusion of structural breaks in the model implies that the volatility spillover effect might be biased in stock markets. The applied models suggest that volatility persistence is overestimated in all asset markets if sudden changes are not recognized in the models.

JEL classification: C51, C58, F31, G12

Keywords: exchange rate, stocks, FIGARCH models, modified ICSS algorithm, Eastern European countries

RePEc: http://ideas.repec.org/a/fau/fauart/v65y2015i6p477-498.html

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