Interest and exchange rate risk and stock returns : a multivariate GARCH-M modelling approach

Beirne, John, Caporale, Guglielmo Maria and Spagnolo, Nicola (2008) Interest and exchange rate risk and stock returns : a multivariate GARCH-M modelling approach. Centre for International Capital Markets discussion papers, 2008 (03). pp. 1-16. ISSN 1749-3412

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Abstract / Description

In this paper we examine the sensitivity of stock returns to market, interest rate, and exchange rate risk in three financial sectors (Banking, Financial Services and Insurance) in 16 countries, including various European economies, the US and Japan. We also test for the presence of causality-in-mean and volatility spillovers. The econometric framework is a four-variate GARCH-in-mean model, which incorporates long-and short-term interest rates in turn. We find in most cases a positive effect of stock market returns on mean returns in each sector; by contrast, interest rates and exchange rates have a significant effect only in a few cases, respectively negative and without a clear sign pattern. As for the three types of risk, these are found to play a role in a minority of cases, with mixed signs. Finally, most cases of volatility spillovers occur from market return to sectoral returns in the insurance and banking sector in European economies, though there are also some instances of interest rate and exchange rate spillovers, both in Europe and the US.

Item Type: Article
Uncontrolled Keywords: Centre for International Capital Markets discussion papers; CICM discussion papers; interest rate; volatility; exchange rate; multivariate generalized autoregressive conditional heteroskedasticity; multivariate GARCH
Subjects: 300 Social sciences > 330 Economics
Department: Guildhall School of Business and Law
Depositing User: Mary Burslem
Date Deposited: 21 Apr 2015 13:47
Last Modified: 21 Apr 2015 13:47


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