A study of volatility spillover effect among the selected Asian, European, North American and South American stock markets

This paper examines price and volatility spillovers across selected North American, European and Asian stock markets. Over the last three decades, there is rapid growth in international equity investments. The increasing trend in equity investment has lead to increase in high demand and supply of foreign currencies. The high demand of currencies and equity flows has created some interdependence between equity returns and exchange rate returns. The increasing interdependency has also increased the volatility transmission betweens stock and foreign exchange market that has increased the international portfolio risk that is faced by investors, which has further lead to decrease the returns of investors’ portfolios. It is important to know about how shocks are transmitted across financial markets (stock and currency market) and also to explore the magnitude of their effects. This will further enhance the success of policies implemented by policy makers. The phenomena can be explained as the local currency depreciation will make domestic firms more competitive by having cheaper exports in international trade. The higher exports will enhance the domestic wealth of firms by appreciating the domestic stock prices of domestic firms. In this aspect, causality will run from exchange rate to stock price. It is also found that there is a greater regional influence among Asian and European stock markets.