Interactions of Spot Foreign Exchange Markets among Taiwan, Hong Kong and Japan: Japanese Forward Premium/Discount as an Information Variable

Abstract

This study takes the foreign exchange rates of Taiwan, Hong Kong and Japan as the research issue, and utilises the VEC GJR-Asymmetric GARCH model to analyse the interaction among spot exchange rates of these three countries. The empirical results prove that the average returns of all foreign exchange markets have their own- and cross-spillovers, and the volatility of the return rate exists ARCH and /or GARCH effects. In addition, using Japanese forward premium/discount as information variable, empirical results find that Japanese forward premium/discount have important explanatory power for the links of Taiwan, Hong Kong, and Japanese spot exchange rates, and the original volatility spillover effect has disappeared, indicating that Japanese forward premium/discount is indeed an information variable. In terms of the volatility asymmetry effect, the results show that the estimated coefficients of asymmetry in Taiwan and Japan are positively significant, indicating that under the impact of bad news, their own market volatilities will be greater than good news. We also justify that the foreign exchange rates of Taiwan and Hong Kong, Taiwan and Japan, and Hong Kong and Japan are more closely linked to each other in the face of the two major events. The US-China trade war and the COVID-19 outbreak have triggered risk contagion, with a crisis in one country quickly spreading to another, intensifying the link between the foreign exchange markets of Taiwan, Hong Kong, and Japan. Our findings may help investors and policymakers find responses to such foreign exchange market turbulence.

Keywords

• foreign exchange market
• forward premium/discount
• vec gjr-asymmetric garch model
• us-china trade war
• covid-19 pandemic