The purpose of this paper is to analyze volatility transmission between the Japanese stock and foreign exchange markets.
In contrast to the existing literature, industry‐level stock data are applied to a trivariate Baba, Engle, Kraft and Kroner‐generalised autoregressive conditional heteroscedasticity (BEKK‐GARCH) model that also includes comparable US industrial stocks returns as a control variable.
Using daily data over the study period 1994‐2007, it was found that news shocks in the Japanese currency market account for volatility transmission in eight of the ten industrial sectors considered. Evidence was also found of significant asymmetric effects in five of these industries.
While the BEKK‐GARCH model enables analysis of volatility transmission between the stock and foreign markets against a background of conditional correlation and asymmetries, the model requires the estimation of a large number of parameters, which can be problematic for a limited dataset.
The paper's findings have important implications for understanding international volatility transmission involving the stock and foreign exchange markets. This in turn can provide insight into investor behaviour.
