Volatility Transmission between Stock and Foreign Exchange Markets: Evidence from Nigeria

Abstract

The direction of volatility transmission between stock and foreign exchange markets is important for hedging strategy, portfolio management and fi nancial market regulation. This paper examines volatility transmission between stock and foreign exchange markets by applying the multivariate GARCH model in the BEKK framework to Nigerian stock returns and the Naira/USD exchange rate data from January 1996 to March 2013. Results of the empirical analysis show evidence of volatility clustering in both stock and foreign exchange markets. The results also show bidirectional shock transmission between stock and foreign exchange markets, suggesting that information flow in the foreign exchange market impact the stock market and vice versa. Finally, the results show evidence of a uni-directional volatility transmission from the foreign exchange market to the stock market. The implication is for investors vigilantly to monitor and dissect all information in the two markets as part of their investment strategy.

Keywords

• stock market
• foreign exchange market
• volatility transmission
• bekk-garch model