Estimating time-varying currency betas with contagion: New evidence from developed and emerging financial markets
Document Type
Journal Article
Publisher
Elsevier
Faculty
Faculty of Business and Law
School
School of Business
RAS ID
18695
Abstract
This paper examines the conditional time-varying currency betas from five developed and six emerging financial markets with contagion and spillover effects. We employ a trivariate asymmetric BEKK-type GARCH-in-Mean (MGARCH-M) approach to estimate the time-varying conditional variance and covariance of returns of stock market index, the world market portfolio and bilateral exchange rate between the US dollar and the local currency. The results show that the world market and currency risks are not only priced in the stock markets, but also time-varying. It is found that currency betas are much more volatile than the world market betas, and currency betas in the emerging markets are more volatile than those in the developed markets. We find empirical evidence of contagion effect and spillovers between stock market and foreign exchange market during the recent global financial crisis, and the effect is stronger in the emerging markets than that in the developed markets. Two applications are provided to illustrate the usefulness of time-varying currency betas.
DOI
10.1016/j.japwor.2014.02.001
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Comments
Long L., Tsui A.K., Zhang Z. (2014). Estimating time-varying currency betas with contagion: New evidence from developed and emerging financial markets. Japan and the World Economy, 30, 10-24. Available here