Volatility Spillover between Currency and Stock Markets in Financial Crisis Period: Evidence from China

Abstract

The study aims to investigate the volatility spillover between the currency and stock markets of China for the period from January 01, 2004 to December 31, 2013. The time frame is divided in to pre, amid and post-financial crises periods. “Generalized Autoregressive Conditional Hetroskedasticity (GARCH)” model is used to analyze the shock spread between these markets. The findings suggest significant bidirectional volatility spillover between the currency and stock markets in amidst and post-financial crisis periods. However, the spillover is more pronounced from currency to stock market in the post-financial crisis case. Moreover, unidirectional volatility flow form stock to currency market was observed in the pre-crisis era. The study helps the regulators to make policies that protect the financial markets from shocks. Similarly, the investors can get advantage, i.e. avoid risk and increase returns by diversifying their investment in non-correlated markets.