Dynamic Relations between International Equity and Currency Markets: The Role of Currency Order Flow
45 Pages Posted: 7 Sep 2004
Previous research on the dynamic linkages between international financial markets focused on bivariate inter-equity or inter-currency relationships and do not allow a specific role for the currency or equity market, respectively. In this paper, we hypothesize that there are important, yet not well understood, dynamic relationships between international equity and currency markets and that these are driven by information spillover via the mechanism of currency order flow. Using a trivariate asymmetric GARCH framework, we find that the relationships between equity and currency markets are significant, bi-directional, and pervasive. These relationships, which co-exist with the relationships between US and foreign equity markets, are much stronger in the volatilities than in the means. Importantly, we find strong support for our information-spillover hypothesis where currency order flow is the economic mechanism by which information is transmitted.
Keywords: Currency order flow, international financial markets, volatility spillover, information spillover
JEL Classification: C32, F31, G12, G14, G15
Suggested Citation: Suggested Citation