The dynamic relationship between exchange rates and stock returns in emerging countries: volatility spillover and portfolio management

摘要

This paper explores the dynamic relationship between exchange rates and stock prices for some emerging countries, namely Hong Kong, Singapore, Malaysia, South Korea, Indonesia, Argentina, Brazil and Mexico. Using the BEKK-MGARCH models, empirical evidence shows a significant mean transmission from the foreign exchange market to the stock market in most emerging countries. However, a feedback relationship is also observed between the two markets. In addition, results reveal that shocks and volatility spillovers between the two markets are bidirectional in most cases. These results have important implications for international portfolio managers and currency risk hedging strategies. National investors in emerging countries should possess more currency in order to reduce the risk of their portfolio investment.