Volatility spillovers between New Zealand stock market returns and exchange rate changes before and after the 1997 Asian financial crisis

Abstract

Kanas, A. (2000) [Volatility spillover between stock returns and exchange rate changes: International evidence. Journal of Business Finance & Accounting, 27 (3) & (4), 447–467] finds that unidirectional volatility spillovers, within the same economy, from six industrialized stock market returns to foreign exchange markets after the 1987 stock crash.  The New Zealand economy is unique in that it is small, open, and exposed to international exchange rate changes, especially to its most important trading partners, USA and Australia.  We hypothesize that there should be a volatility spillover effect from exchange rate changes to the stock market returns with in the New Zealand economy.  The EGARCH model is employed to account for New Zealand’s down-market, or leverage, effect, and to test for the bidirectional volatility spillovers.  The Asian Financial Crisis occurs in the middle of our sample period from 190 to 2004.  Our empirical evidence shows that, after the Asian Financial Crisis, the volatility spillover from exchange rate changes to the stock market returns becomes dominant over the reverse direction.