Open AccessTransmission Of Volatility Shocks Between The Equity And Foreign Exchange Markets In South Africa
Author(s) -
Lumengo BongaBonga
Publication year - 2013
Publication title -
journal of applied business research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.149
H-Index - 22
eISSN - 2157-8834
pISSN - 0892-7626
DOI - 10.19030/jabr.v29i5.8034
Subject(s) - economics , volatility (finance) , equity (law) , volatility swap , volatility smile , foreign exchange market , implied volatility , financial economics , foreign exchange , forward volatility , monetary economics , econometrics , volatility risk premium , political science , law
The paper assesses the dynamic interaction between exchange rates and stock market volatility in South Africa by making use of the generalised impulse response function obtained from a bivariate VAR model. Volatility variables in the VAR system are obtained from a family of GARCH models based on criteria such as covariance stationarity and leverage effects. The findings of the paper show that foreign exchange conditional volatility responds positively to volatility shocks to the equity market. Nonetheless, the response of the equity market conditional volatility to volatility shocks to the foreign exchange market is short-lived and neutral for most of the time horizon periods. The paper attributes this finding mainly to the extent of foreign participation in emerging equity market in general and the South African equity market in particular.