Prague Economic Papers 2018, 27(3):270-292 | DOI: 10.18267/j.pep.669

Interrelationship and Spillover Effect between Stock and Exchange Rate Markets in the Major Emerging Economies

Jovan Njegić1, Dejan Živkov2, Irena Janković3
1 Business School of Novi Sad, University of Novi Sad, Serbia (jovan.nj@gmail.com)
2 Business School of Novi Sad, University of Novi Sad, Serbia (dejanzivkov@gmail.com)
3 Faculty of Economics, University of Belgrade, Serbia (irenaj@ekof.bg.ac.rs)

This paper analyses the dynamic nexus and bidirectional spillover effect between stocks and exchange rates in seven major emerging markets and one developed market. Three types of BEKK-GARCH models were utilized in the research process - basic BEKK-GARCH, asymmetric BEKK-GARCH and asymmetric BEKK-GARCH with structural breaks. Model with breaks gave the best fitting results in six out of eight cases. VAR based volatility spillover method serves as a complementary methodology. Results showed that dynamic connection between two major asset classes behaves in accordance with the portfolio balanced approach in emerging markets, while the nexus is in line with the flow oriented theory in the US market. In addition, according to the BEKK-GARCH results, shock and volatility spillover effect is predominantly directed from exchange rate market to stock market in all countries, while in the VAR based model it is not so obvious.

Keywords: stocks, exchange rate, BEKK-GARCH, structural breaks
JEL classification: C51, F31, G15

Accepted: February 13, 2018; Published: June 1, 2018  Show citation

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Njegić, J., Živkov, D., & Janković, I. (2018). Interrelationship and Spillover Effect between Stock and Exchange Rate Markets in the Major Emerging Economies. Prague Economic Papers, 27(3), 270-292. doi: 10.18267/j.pep.669
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