Volatility spillover between stock and foreign exchange market of China: evidence from subprime Asian financial crisis
| DOI | https://doi.org/10.1108/JABS-01-2016-0003 |
| Pages | 220-232 |
| Date | 08 May 2018 |
| Published date | 08 May 2018 |
| Author | Khalil Jebran |
| Subject Matter | Strategy,International business |
Volatility spillover between stock and
foreign exchange market of China:
evidence from subprime Asian
financial crisis
Khalil Jebran
Abstract
Purpose –This paper aims to examine the volatility spillover dynamics between stock and foreign
exchangemarket of China considering subprime2007 financial crisis period.
Design/methodology/approach –This study considereddaily data from January 2, 2002, to December
31, 2013. The sample period has been further divided into three periods; full sample period (January
2002-December 2013),pre-crisis period (January 2002-October 2007) andpost-crisis period (October
2007-December 2013). This study opted Exponential Generalized Autoregressive Heteroskedasticity
(EGARCH)model for the purpose of investigating asymmetricvolatility spillover.
Findings –The results obtainedusing the EGARCH model imply that volatility spillover dynamics varies
from period to period. In full sample period, the results show evidence of significant unidirectional
volatility spilloverfrom foreign exchange market to stock market.In pre-crisis period, the results indicate
unidirectional volatility spillover from stock market to foreign exchange market. However, in post-crisis
period, the results revealsignificant bidirectional volatility spilloverbetween stock and foreign exchange
market.
Practical implications –The results of the study are important for policy makers because
understanding the behavior of the financial markets, i.e. stock and foreign exchange market, would
increase the success of policies implemented in a crisis situation. The results would help investors to
formulateefficient portfolios.
Originality/value –This study is an importantcontribution to the existing literature in terms of analyzing
volatility spillover between stock and foreign exchange market in an emerging economy, China.
Furthermore,this study explored the volatility spilloverdynamics between the two markets by considering
the pre andpost subprime Asian crisis period.
Keywords China, Stock market, EGARCH, Financial crisis, Foreign exchange market, Volatility
spillover
Paper type Research paper
1. Introduction
The importance of unveiling relationship between stock and forex market has drawn the
attention of researchers, market participants and policy makers (Kumar, 2010). The
information about association between stock price and exchange rate would help policy
makers in the decision process of fiscal and monetary policies. A positive effect on
aggregate demand is observed in a booming stock market. The expansionary monetary or
contractionary fiscal policies targeting the interest rate and exchange rate would be
neutralized in that specific situation. The success of policies implemented wouldincrease if
there is knowledge about integration of the two financial markets (Kumar, 2010;Jebran,
Khalil Jebran is based at
School of Accounting,
Dongbei University of
Finance and Economics,
Dalian, China.
Received 6 January 2016
Revised 10 April 2016
23 August 2016
22 November 2016
Accepted 11 December 2016
PAGE220jJ OURNAL OF ASIA BUSINESS STUD IES jVOL.12 NO. 2 2018, pp.220-232, ©EmeraldPublishingLimited,ISSN1558-7894 DOI10.1108/JABS-01-2016-0003
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