MEASURING RETURN AND VOLATILITY SPILLOVERS

IN GLOBAL FINANCIAL MARKETS

Pongsakorn Suwanpong
FACULTY OF ECONOMICS, CHULALONGKORN UNIVERSITY BANGKOK, THAILAND

__________________________________________________________________
Abstract
This paper purposely measures return and volatility spillovers in global financial markets,
foreign exchange and equity markets, by employing the variance decomposition of a vector
autoregression (VAR) and calculating into spillover indices, proposed by Diebold and Yilmaz (2009).
The objectives of the paper is to investigate not only the sources of return and volatility spillovers in
foreign exchange market, which may arise from regional or major trading partners currencies, but also
to clarify the sources of return and volatility spillovers in equity market. In general, the empirical finding
suggests that approximately 80% of forecast error variance comes from spillovers, both returns and
volatilities. In particular, in analysis of currency market, the author found that the return spillover to
Thai baht (THB), apart from itself, comes primarily from US dollar, Indonesian rupiah (IDR), and
Singapore dollar (SGD). In addition, the volatility spillover to Thai baht (THB) arises from Indonesian
rupiah (IDR) and Philippine peso (PHP). However, in an analysis of spillovers in equity market, the
author found that the return spillover to Stock Exchange of Thailand (SET), apart from itself, results
primarily from New York Stock Exchange (NYSE), while there are no volatility spillovers from other
national equity markets to Stock Exchange of Thailand (SET).These empirical findings are essential for
international portfolio managers devising portfolio strategies. Moreover, the policy implication is
particular important to central bank for intervention the foreign exchange market in the case of excess
volatility.
I.

Introduction

The global foreign exchange activities have expedited in recent two decades on account of rapid
globalization, especially in financial markets. Consistent with globalization, the speedy economic
liberalization of the international trade and financial markets, conjointly the adoptions of floating
exchange rate regime by industrialized countries in the early 1970s have made cross-border capital flows
swift and effortless (Krugman and Obstfeld, 2009). This evolution has heralded an era of increased
exchange rate risk and volatility in global currency market. These developments also indicate multiply
occurrences of foreign exchange rate volatility spillovers and transmissions across currency markets. For
comprehensive perspective, stock markets should be sensitive to the increasing volatility of exchange
rates. Currency markets are also more responsive to global portfolio investments and innovations in
stock markets resulting from the economic deregulation and integration in the global financial market
since the 1980s (Yang and Doong, 2004).

In relevant literature, theoretical links between stock prices and exchange rates have taken two
forms. Firstly, flow-oriented models of exchange rate determination (Dornbusch and Fisher, 1980)
assume that the exchange rate is determined largely by a countrys current account or trade balance
performance. These models posit that changes in exchange rates affect international competitiveness and
trade balance, thereby influencing real economic variables such as real income and output. Stock prices,
usually defined as a present value of future cash flows of firms, should adjust to the economic
perspectives. Thus, flow oriented models represent a positive relationship between stock prices and
exchanges rates with direction of causation running from exchange rates to stock prices. . Causation can
be explained as follows. Domestic currency depreciation makes the local firms more competitive, thus
their exports become cheaper in international comparison. Higher exports lead to higher incomes and
increase in firms stock prices.
On the other hand, stock oriented models of exchange rate determination (Branson, 1983; Frankel,
1983) put much stress on the role of financial account in determining exchange rate dynamics. These
models view exchange rates as equating the supply and demand for assets such as stocks and bonds.
Since the values of financial assets are determined by the present values of their future cash flows,
expectations of relative currency values play a considerable role in their price movements, especially for
internationally held financial assets. Therefore, stock price innovations may affect exchange rate
dynamics.
Previous studies, which have examined the relationship between stock and foreign exchange markets
mainly for US (e.g. Aggarwal (1981), Soenen and Hennigar (1988), Roll (1992) and Chow et al.
(1997)), found different results concerning the links between the two markets. For example, Aggarwal
(1981) finds that revaluation of the US dollar is positively related to stock market returns. In contrast,
when Soenen and Hennigar (1988) considered a different period, 1980-1986, found a significantly
negative relationship. Roll (1992), who used daily data over the period 1988-1991 found also a positive
relationship between the two markets. On the other hand, Chow et al (1997) using monthly data for the
period 1977-1989 found no relationship for monthly excess stock returns and real exchange rate returns.
When repeating the exercise, however, with longer than six months horizons they found a positive
relationship between a strong dollar and stock returns. Despite the examination of the linkages and
interactions between exchange rates and stock prices, only a limited body of the paper has attempted to
analyze the possibility that there are return and volatility spillovers in currency and equity markets, and
volatility spillover effect can exist between the stock and currency markets. An examination of the
volatility spillover process also enhances the understanding of information transmission between stock
prices and exchange rates.
This paper purposely measures return and volatility spillovers in global financial markets, foreign
exchange and equity markets, by employing the variance decomposition of a vector autoregression
(VAR) and calculating into spillover indices, proposed by Diebold and Yilmaz (2009). The objectives of
the paper is to investigate not only the sources of return and volatility spillovers in foreign exchange
market, which may arise from regional or major trading partners currencies, but also to clarify the
sources of return and volatility spillovers in equity market. These empirical findings are essential for

international portfolio managers devising portfolio strategies. Moreover, the policy implication is
particular important to central bank for intervention the foreign exchange market in the case of excess
volatility.
The remainder of the paper is organized as follows. The next section exhibits the data and
methodological issues, the spillover index. Section III is the empirical findings in the global financial
markets and the empirical analysis. Section IV investigates the dynamic spillovers and interdependence
between the currency and equity markets. Finally, section V summarizes.
II.

Data and Methodology

i.
Data

The data set consists of daily equity market indices for 9 countries and exchange rates for 9
countries. The stock indices for 9 countries are NYSE Composite Index, FTSE MIB Index, Nikkei 225
Index, Jakarta Composite Index, FTSE Bursa Malaysia KLCI Index, Philippine SE Index, Straits Times
Index, SET index, and S&P/TSX Composite Index. The exchange rates (per US Dollar) for 9 countries
are trade-weighted U.S. dollar index, Great Britain pound (GBP), Japanese yen (JPY), Indonesian rupiah
(IDR), Malaysian ringgit (MYR), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), and
Canadian dollar (CAD) (see Appendix 1).
The datasets in equity market are daily nominal local-currency composite stock market indices
for ten recent years, Jan 2000 Jan 2010, obtained from Bloomberg, and the datasets in currency market
are daily direct-quoted foreign exchange rate for ten recent years, Jan 2000 Jan 2010, acquired from
Reuters. The daily data is aggregated into weekly observations to eliminate end-of-week effects and
time differences in trading sessions across markets. The paper employs the new methodology of
spillover estimation of Diebold and Yilmaz (2009) based on a standard VAR and the Cholesky
decomposition of an error variance-covariance matrix. The main instruments are return and volatility
spillovers. Spillovers are defined as short-run interdependencies, effects which fluctuations in one
market exert on other markets (Diebold and Yilmaz, 2009).
ii.

Methodology

A statistical analysis of returns and volatility is employed to study stock market

interdependencies. Returns are calculated in accordance with the classical method as the change in log
price (Yang and Doong, 2004).
In order to remove time differences in trading across markets and end-of-week effects daily observations
are aggregated into weekly. Closing prices on each Wednesday represent weekly closing observations. If
Wednesday observation is absent, a corresponding adjacent value is used with priority to Thursday one.
Volatility is assessed following the Garman and Klass (1980) approach incorporating of stock market
information available for investors low, high, opening, and closing prices. Obviously, this estimator is
more efficient than the classical estimation since it demands the process of continuous price observation

that automatically yields to a large amount of information collected and employed. As a consequence,
weekly volatility is assumed constant over a week and is modeled according to the following rule:

Where
week,

is the maximum of all high prices over a week,

is the minimum of all low prices over a
is the opening on Monday, is the closing on Friday, all prices are considered in logs.

The next step is to assess indices of return/volatility spillovers in accordance with the Diebold
and Yilmaz (2009) methodology. Indices are estimated by means of traditional VAR models

Where
is a vector of returns or volatility, and s is the number of stock
markets, p is the order of the model) and the Cholesky decomposition of a forecast error variance.
A spillover index is defined as a summary effect attributable to external shocks over total
forecast error variation of the system in percent. Thus, the total spillover index for the n-step-ahead
forecast may be represented as
(see Appendix 2)
Where
III.

is a matrix of shocks of the studied system.

Empirical Results: the Return and Volatility Spillovers in Financial Markets
i.
Descriptive Statistics

The dataset in both currency and equity markets for 9 countries is used in log term, and the are
tested for unit root stationary for the first difference. There are descriptive statics:
Table 1: Descriptive statistics, global currency market returns, 1/1/200031/1/2010
CAD

USD

GBP

IDR

JPY

MYR

PHP

SGD

THB

Mean

0.245087

4.522563

-0.52448

9.137921

4.714034

1.299748

3.908643

0.488565

3.649044

Median

0.224103

4.483906

-0.51528

9.126415

4.720372

1.334869

3.92829

0.516529

3.672496

Maximum

0.478839

4.786658

-0.32092

9.392662

4.902307

1.335001

4.03176

0.613563

3.823847

Minimum

-0.06817

4.271891

-0.73726

8.850088

4.464413

1.144541

3.692622

0.301511

3.38439

Std. Dev.

0.150947

0.145046

0.117037

0.088847

0.088836

0.051038

0.093096

0.084851

0.112639

Skewness

-0.03741

0.331293

0.020881

0.318934

-0.59078

-1.291

-0.62962

-0.57996

-0.49335

Kurtosis

1.719277

1.907501

1.663465

4.294774

3.083758

3.509639

2.523141

2.151057

2.10863

523

523

523

523

523

523

523

523

523

Observations

Table 2: Descriptive statistics, global currency market volatilities, 1/1/200031/1/2010

CAD

USD

GBP

IDR

JPY

MYR

PHP

SGD

THB

Mean

3.53E-05

2.72E-05

3.86E-05

-0.16337

4.36E-05

-0.03133

-0.0084

9.76E-06

-0.00164

Median

2.17E-05

2.02E-05

2.35E-05

1.79E-05

2.99E-05

1.61E-09

1.10E-05

6.38E-06

8.13E-06

Maximum

0.000815

0.000453

0.001169

0.002199

0.000928

6.46E-05

0.00268

0.000221

0.004461

Minimum

2.50E-06

1.21E-06

3.00E-06

-6.37051

5.03E-06

-0.12875

-1.12016

9.47E-07

-0.92313

Std. Dev.

5.82E-05

3.08E-05

7.33E-05

0.986639

5.81E-05

0.054874

0.096148

1.37E-05

0.040373

Skewness

7.410668

7.229901

9.599359

-5.86839

8.213842

-1.18253

-11.3048

8.804598

-22.8002

Kurtosis

80.01955

84.50224

126.7029

35.45698

109.1234

2.40715

128.813

117.8885

520.8999

523

523

523

523

523

523

523

523

523

Observations

Table 3: Descriptive statistics, global equity market returns, 1/1/200031/1/2010

United
States

Canada

United
Kingdom

Indonesia

Japan

Malaysia

Philippines

Singapore

Thailand

Mean

9.17E+00

8.84E+00

1.04E+01

6.834391

9.42E+00

6.791308

7.525995

7.64E+00

6.27106

Median

9.14E+00

8.82E+00

1.04E+01

6.91E+00

9.37E+00

6.79E+00

7.53E+00

7.62E+00

6.46E+00

Maximum

9.614752

9.240044

10.80679

7.948125

9.924989

7.32E+00

8.249105

8.246533

6.796343

Minimum

8.69E+00

8.36E+00

9.46E+00

5.837316

8.88E+00

6.323749

6.901083

7.08E+00

5.538357

Std. Dev.

2.38E-01

1.96E-01

2.64E-01

0.65793

2.47E-01

0.237103

0.363667

2.75E-01

0.359794

Skewness

0.062319

0.109088

-0.42891

0.116647

0.051422

0.258766

0.187756

0.200193

-0.43186

Kurtosis

1.923053

2.328323

2.63074

1.590534

2.000777

2.276455

2.011088

2.282575

1.678891

523

523

523

523

523

523

523

523

523

Observations

Table 4: Descriptive statistics, global equity market volatilities, 1/1/200031/1/2010

United
States

Canada

United
Kingdom

Indonesia

Japan

Malaysia

Philippines

Singapore

Thailand

Mean

1.33E-04

1.29E-04

1.07E-04

0.00018

1.65E-04

6.95E-05

0.000113

8.26E-05

0.000167

Median

5.33E-05

5.10E-05

4.05E-05

9.84E-05

9.99E-05

3.54E-05

7.15E-05

2.52E-05

9.44E-05

Maximum

0.002753

0.004137

0.002577

0.003153

0.005016

1.13E-03

0.002262

0.002399

0.004441

Minimum

4.04E-06

3.31E-06

4.17E-08

2.87E-06

3.55E-06

1.65E-06

5.53E-06

2.34E-07

7.14E-06

Std. Dev.

2.81E-04

3.20E-04

2.23E-04

0.000297

3.24E-04

0.000106

0.000158

2.33E-04

0.000292

Skewness

6.026145

7.816055

6.084571

5.45625

9.210521

4.531051

6.649754

6.981881

7.770958

Kurtosis

46.60802

78.83395

52.20425

41.73445

114.6761

32.49861

74.15138

59.80769

95.68371

523

523

523

523

523

523

523

523

523

Observations

ii.

Spillover Tables

Here is a full-sample analysis of 9 countries of currency and equity market return and volatility
spillovers. As part of the analysis, the author follows decomposing the Spillover Index into all of the
forecast error variance components for variable i coming from shocks to variable j, for all i and j
proposed by Diebold and Yilmaz (2009). To begin with, the author characterizes return and volatility
spillovers over the entire sample, January 2000 January 2010. The author reports spillover indexes
(see Appendix 3) for returns and volatilities in the lower right corners of tables 5 to 8, chronologically.
The ijth entry in the table is the estimated contribution to the forecast error variance of country i (returns
in currency market in table 5, volatility in currency market in table 6, returns in equity market in table 7,
and volatility in equity market in table 8) coming from factors or innovations to country j Hence, the offdiagonal column sums (labeled To Others) or row sums (labelled From Others), when totalled across
countries, give the numerator of the spillover index. While, the column sums or row sums (including
diagonals) give the denominator of the spillover index.
The important empirical findings in currency market from tables 5 and 6 are that approximately
80% of forecast error variance comes from spillovers, both for returns (77%) and volatilities (85%).
Besides, there is roughly 100% of forecast error variance comes from spillovers. Hence spillovers are
important in both returns and volatilities in currency market, and on average return and volatility
spillovers are of the same magnitude, unconditionally. However, at any given point in time,
conditionally, return and volatility spillovers may be very different and, more generally, their dynamics
may be different. Specifically, the return spillover to Thai baht (THB), apart from itself, comes primarily
from US dollar, Indonesian rupiah (IDR), and Singapore dollar (SGD). In addition, the volatility
spillover to Thai baht (THB) arises from Indonesian rupiah (IDR) and Philippine peso (PHP). On the
other hand, the return spillover to Stock Exchange of Thailand (SET), apart from itself, results primarily
from New York Stock Exchange (NYSE), while there are no volatility spillovers from other national
equity markets to Stock Exchange of Thailand (SET).
Table 5: Spillover table, global currency market returns, 1/1/200031/1/2010
From
1
CAD

To
1
2
3
4
5
6
7
8
9

2
USD

3
GBP

4
IDR

5
JPY

6
MYR

7
PHP

8
SGD

9
THB

From
Other

CAD
USD
GBP
IDR
JPY
MYR
PHP
SGD
THB

2266.817
2.526953
50.8056
7.17877
27.0962
2.259446
7.690114
7.558733
2.259446

850.2286
1297.031
90.5266
29.04953
21.83204
1.720473
47.84932
6.183872
55.57857

821.5799
537.0806
847.7007
34.98155
90.65503
0.501722
46.58242
7.037695
13.88031

191.5088
35.66388
13.38084
2030.111
104.187
1.960731
4.93252
11.94064
6.31467

5.397126
474.0748
427.8744
59.56881
1397.706
7.19925
2.5819
4.234862
21.36321

518.3312
136.9931
1.563375
60.75371
77.61979
1483.049
6.254445
39.12858
76.3066

157.0648
20.82601
6.380017
183.4207
48.22015
109.18
1679.879
59.09605
135.9329

700.8597
463.1308
101.0935
165.8283
35.82132
170.3139
4.328726
718.5272
40.09657

220.499
149.4115
45.73847
146.6191
65.56911
18.49153
60.60852
159.5365
1533.526

3465.469
1819.708
737.3629
687.4004
471.0007
311.627
180.828
294.7169
351.7323

To Other

107.3753

1102.969

1552.299

369.8891

1002.294

916.9509

720.1206

1681.473

866.4737

77.12775%

Total

2374.192

2400

2400

2400

2400

2400

2400

2400

2400

Table 6: Spillover table 2, global currency market volatilities, 1/1/200031/1/2010

From
To

CAD

USD

GBP

IDR

JPY

MYR

PHP

SGD

THB

From
Other

CAD

1799.487

712.3202

1121.072

151.6549

909.0414

45.32858

6.560701

786.192

3.81776

3735.987

USD

107.9592

1329.301

347.1368

62.21134

200.5799

42.72806

22.66169

241.0457

10.54899

1034.872

GBP

44.82097

125.731

531.9477

124.5456

165.4403

42.16916

23.38499

163.2076

15.25097

704.5505

IDR

112.0332

50.60311

106.2025

1714.409

136.4583

29.90116

554.1951

76.17474

121.074

1186.642

JPY

17.09502

41.81128

30.00663

29.37617

696.658

72.31061

16.38426

87.78773

8.506381

303.2781

MYR

19.06005

15.12536

16.19321

28.31453

33.767

2071.322

14.66298

13.84017

16.73095

157.6943

PHP

59.60152

31.89048

46.8227

45.05104

49.8797

22.74298

1271.182

43.79862

255.9561

555.7432

SGD

232.042

89.53843

195.3307

70.49383

198.6172

33.44195

15.96123

979.9029

6.183903

841.6092

THB

19.06005

3.679486

5.288261

173.9436

9.558237

40.05555

475.0071

8.050546

1961.931

734.6428

To
Other

611.672

1070.699

1868.052

685.591

1703.342

328.678

1128.818

1420.097

438.0691

85.65037%

Total

2411.159

2400

2400

2400

2400

2400

2400

2400

2400

Table 7: Spillover table 3, global equity market returns, 1/1/200031/1/2010

From

To
1
2
3
4
5
6
7
8
9

Canada

United
States

United
Kingdom

Indonesia

Japan

Malaysia

Philippines

From

Singapore

Thailand

Other

848.3336

3.053926

43.10494

90.21943

156.3115

57.26278

14.1411

67.74751

45.36059

477.2017

1343.283

2203.791

1287.585

547.7299

747.3485

360.1788

595.6241

1227.189

713.2116

6822.15

Thailand

53.7426
38.30092
63.83901
15.46529
24.40153
5.769918
15.46529

58.56185
14.04612
21.84476
37.36501
33.62664
7.207731
20.50279

862.8272
5.430236
146.9898
11.47658
36.12088
3.211105
3.25423

19.29377
1542.207
7.871014
6.151084
139.9469
13.56219
33.01882

156.0841
22.64927
1243.353
4.9328
54.32779
3.060391
11.9323

61.26683
496.69
89.17161
1199.819
26.76637
107.0202
1.824066

13.4283
489.4769
54.56744
10.34614
1144.448
71.94332
6.024982

114.7647
152.4458
123.6375
67.93184
81.61936
564.049
0.615136

32.72881
191.5921
81.60395
18.66962
90.78612
90.8727
1135.174

509.871
1410.631
589.5251
172.3384
487.5956
302.6476
92.6376

To Other

1560.268

196.2088

1537.173

857.7931

1156.647

1200.181

1255.552

1835.951

1264.826

100.5581%

Total

2408.602

2400

2400

2400

2400

2400

2400

2400

2400

Canada
United
States
United
Kingdom
Indonesia
Japan
Malaysia
Philippines
Singapore

Table 8: Spillover table 4, global equity market volatilities, 1/1/200031/1/2010

From

1
2
3
4
5
6
7
8
9

To

Canada

United States

United Kingdom

Indonesia

Japan

Malaysia

Philippines

Singapore

Thailand

Canada
United
States
United
Kingdom

1756.494

1159.87

736.4762

618.1834

862.966

241.0432

511.1786

900.2417

254.4891

5284.448

242.1554

775.6943

593.783

230.199

682.9095

107.1915

328.3272

434.6886

102.0177

2721.272

Thailand

54.0751
187.6345
69.49334
10.61258
38.88035
18.01211
10.61258

73.7091
209.2484
97.8451
20.67008
35.36069
9.287938
18.31434

695.3979
148.5484
146.9864
18.37892
28.99121
18.2878
13.1502

58.99959
1324.681
71.42332
18.52674
15.53843
35.01314
27.43545

53.37213
204.0341
511.7827
23.48215
25.58663
17.4355
18.43131

39.37015
247.5473
78.37433
1551.629
21.2497
19.06754
94.52696

45.03016
288.7544
63.82876
77.05425
954.8738
44.43407
86.51888

189.7674
283.1334
138.9285
16.36872
43.40634
383.3849
10.08037

14.71099
70.95313
39.56495
37.14777
22.08052
29.67046
1829.365

529.0346
1639.854
706.4448
222.2412
231.0939
191.2086
279.0701

To Other

631.4759

1624.306

1704.602

1075.319

1888.217

848.3707

1445.126

2016.615

570.6345

109.3634%

2387.97

2400

2400

2400

2400

2400

2400

2400

2400

Indonesia
Japan
Malaysia
Philippines
Singapore

Total

IV.

From
Other

Summary

In this paper, the author purposely measures return and volatility spillovers currency and equity
markets, by employing the variance decomposition of a vector autoregression (VAR) and calculating
into spillover indices, proposed by Diebold and Yilmaz (2009). The important empirical findings in
currency market are that approximately 80% of forecast error variance comes from spillovers. Besides,
there is roughly 100% of forecast error variance comes from spillovers. Hence spillovers are important
in both returns and volatilities in currency market, and on average return and volatility spillovers are of
the same magnitude, unconditionally. In particular, the return spillover to Thai baht (THB), apart from
itself, comes primarily from US dollar, Indonesian rupiah (IDR), and Singapore dollar (SGD). In
addition, the volatility spillover to Thai baht (THB) arises from Indonesian rupiah (IDR) and Philippine
peso (PHP). On the other hand, the return spillover to Stock Exchange of Thailand (SET), apart from
itself, results primarily from New York Stock Exchange (NYSE), while there are no volatility spillovers
from other national equity markets to Stock Exchange of Thailand (SET).These empirical findings are
essential for international portfolio managers devising portfolio strategies. Moreover, the policy
implication is particular important to central bank for intervention the foreign exchange market in the
case of excess volatility.

References
Aggarwal, R. (1981), Exchange Rates and Stock Prices: A Study of the US Capital Markets under
Floating Exchange Rates, Akron Business and Economic Review, (Fall), pp.7-12.
Branson, W.H. 1983, Macroeconomic Determinants of Real Exchange Rate Risk, in R.J. Herring (ed.)
Managing Foreign Exchange Rate Risk, Cambridge University Press, Cambridge, MA.
Chow, E.H., W.Y. Lee and M.S. Solt, 1997, The Exchange Rate Risk Exposure of Asset Returns, Journal
of Business, 70, 105-123.
Diebold F. X., Yilmaz K., (2009), Measuring Financial Asset Return and Volatility Spillovers, With
Application to Global Equity Market, The Economic Journal, 2009, pp.158-171.
Doong, S. C. and Yang, S. Y., (2004), Price and Volatility Spillovers between Stock Markets and
Exchange Rates: Empirical Evidence from the G-7 Countries, International Journal of Business and
Economics, Vol. 3, No. 2, pp.139-153
Dornbusch, R. and S. Fischer, (1980), Exchange Rates and the Current Account, American Economic
Review, 70(5), pp.960-971.
Jeffrey A. Frankel., (1987), Monetary and Portfolio Balance Models of Exchange Rate Determination,
Economics Working Papers 8752, University of California at Berkeley
Garman, Mark B. and Michael J. Klass (1980), On the Estimation of Security Price Volatilities from
Historical Data, Journal of Business, 53, 67-78.
Krugman, P.R., and M. Obstfeld, 2009, International Economics: Theory and Policy, 8th Edition,
Pearson International Edition.
Roll, R., 1992, Industrial Structure and the Comparative Behaviour of International Stock Market
Indices, Journal of Finance, 47, 3-41.
Soenen, L.A. and E.S. Hennigar, 1988, An Analysis of Exchange Rates and Stock Prices - The US
Experience between 1980 and 1986, Akron Business and Economic Review, (Winter), pp.7-16.

Appendix
Appendix 1
Supplementary table for composite indices of national equity market and foreign exchange rate
Countries
1.
2.
3.
4.
5.
6.
7.
8.
9.

United State
United Kingdom
Japan
Canada
Indonesia
Malaysia
Philippines
Singapore
Thailand

Composite indices of national

equity markets
NYSE Index
FTSE MIB Index
NKY Index
TSX Index
JCI Index
FBMKLCI Index
PCOMP Index
STI Index
SET Index

Foreign exchange rates

DXY (Dollar Index)
GBP
JPY
CAD
IDR
MYR
PHP
SGD
THB

Appendix 2
Consider a standard vector autoregression (VAR) model
____ (1)
Where

is a vector.

The property of stability allows rewriting (1) in moving average process (MA) presentation
____ (2)
From the definition of inverse matrices to determine the matrix operator

Where

Which

A Cholesky decomposition of a symmetric positive-definite matrix gives another representation of MA model from equation
(2)

____ (3)
Where
and
covariance matrix of

is a lower triangular matrix of the Cholesky factorization of the variance.

The error vector of the one-step-ahead forecast

has the following form

,

Where
Hence, the variance of the one-step-ahead errors in forecasting
is
in
forecasting
is
and in forecasting
is
. The
decomposition makes it possible to split the variance of forecast errors into parts related to local and
external shocks. Thus
,for example, is an intensity of a local shock of
, while
is an
intensity of an external shock from
on
.
In compliance with the Diebold and Yilmaz methodology, a spillover index is defined as a summary
effect attributable to external shocks over total forecast error variation in percent. For example, the
spillover index for the one-step-ahead forecast is

Generalization for the n-step-ahead forecast produces the following formula:

Appendix 3
Table A1: Spillover index, global currency market returns, 1/1/200031/1/2010

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

CAD
88.88889
89.05872
89.1048
89.12217
89.13501
89.15094
89.17277
89.20138
89.23687
89.27896
89.32718
89.38099
89.43981
89.50308
89.57023
89.64074
89.71411
89.78988
89.86762
89.94693
90.02745
90.10886
90.19087
90.2732

USD
92.23427
92.48808
92.66903
92.8348
92.99377
93.14933
93.30242
93.45308
93.60105
93.74597
93.88747
94.02525
94.15904
94.28866
94.41394
94.53482
94.65126
94.76324
94.87082
94.97406
95.07304
95.16786
95.25865
95.34554

Return Spillover Index (Global Currency Market)

GBP
IDR
JPY
MYR
PHP
94.25693 89.34856 91.92664 91.60617 90.91978
94.64399 89.84308 92.15647 92.18814 91.43126
94.82284 89.98424 92.28849 92.43168 91.60519
94.97882
90.0632 92.41086
92.5578
91.7034
95.12585 90.12605 92.53404 92.63857 91.76761
95.27035 90.18514 92.66068
92.7013 91.81974
95.41397
90.2451 92.79128 92.75788 91.86876
95.55687 90.30739 92.92535 92.81388 91.91891
95.69859 90.37231 93.06209 92.87206 91.97222
95.83844 90.43964 93.20064 92.93384 92.02957
95.97572 90.50895 93.34012 92.99988 92.09124
96.10977 90.57974 93.47972 93.07039 92.15716
96.24001 90.65148 93.61868 93.14537 92.22706
96.36598 90.72369 93.75636
93.2246 92.30057
96.48734 90.79591 93.89218 93.30779 92.37726
96.60383 90.86775 94.02566 93.39457 92.45668
96.7153 90.93887
94.1564 93.48453 92.53838
96.82168 91.00896 94.28409 93.57724 92.62191
96.92296 91.07778 94.40846 93.67228 92.70686
97.01921 91.14512 94.52932
93.7692 92.79285
97.11051 91.21081 94.64654
93.8676 92.87952
97.197 91.27473 94.76002 93.96707 92.96656
97.27885 91.33677
94.8697 94.06722 93.05366
97.35623 91.39687 94.97559 94.16772 93.14056

SGD
95.72692
95.88682
95.99053
96.07729
96.15911
96.23857
96.31659
96.39335
96.46885
96.54296
96.61554
96.68647
96.75562
96.82289
96.8882
96.9515
97.01274
97.07191
97.12898
97.18397
97.2369
97.28777
97.33664
97.38352

THB
91.65174
92.21447
92.37463
92.45823
92.51362
92.56091
92.60736
92.65588
92.70742
92.76207
92.8195
92.87922
92.94066
93.00329
93.06663
93.13022
93.19369
93.25672
93.31904
93.38045
93.44077
93.49988
93.55768
93.6141

Table A2: Spillover index, global currency market volatilities, 1/1/200031/1/2010

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

CAD
88.88889
89.40136
89.53812
89.61787
90.16933
90.60206
90.55072
91.30066
91.62065
91.81452
91.96407
92.16945
92.356
92.51134
92.54975
92.63858
92.67988

USD
89.16986
89.78463
90.23172
92.06313
92.25845
92.31437
92.22855
92.49521
93.11701
93.32498
95.34399
95.10134
95.10686
95.05279
95.13788
95.24061
95.31058

Volatility Spillover Index (Global Currency Market)

GBP
IDR
JPY
MYR
PHP
92.29207 88.92071 92.79534
89.0816 92.21525
92.54656 89.22919 93.06964 89.31574 92.30214
96.95508 89.52542 95.78327 89.48157 92.32859
97.54432 89.70826
96.1695
89.6563 92.37911
97.53026 89.86896 96.24346
89.7228 92.43162
97.68556 90.08433 96.38248 89.86716 92.45527
97.78552 90.31237 96.47834 89.99351 92.47975
97.89353
90.7087 96.70208 90.00791 92.51617
97.92956
91.0136 96.79405 90.11855 92.67723
98.0305 91.51838 97.20726 90.31869
92.7259
98.09661 91.62871 97.35581 90.39741 92.73397
98.125 91.78991 97.41329 90.40661 92.75486
98.15088 92.88122 97.41632
90.5948 94.60652
98.06335 93.51043 97.44837 90.77829 95.85445
98.10763 93.59977 97.46944 90.81097 95.88068
98.20199 93.60651 97.50507 90.84309 95.88885
98.23057 93.78632 97.51594 90.92982 95.89642

SGD
90.37697
91.34442
91.75113
93.03524
93.8024
94.18666
94.4455
94.5423
95.26639
95.32954
96.93359
97.02227
96.91875
96.95495
96.80931
96.77544
96.79711

THB
88.9192
88.94755
88.99585
89.02602
89.057
89.2614
91.35332
91.48103
91.50981
91.54044
91.57789
91.58872
91.5974
91.60549
91.62829
91.64014
91.64278

18
19
20
21
22
23
24

92.70707
92.74174
92.79276
92.80518
92.86194
92.88941
92.8856

95.51222
95.50827
95.52509
95.54764
95.57342
95.63147
95.71987

98.21057
98.22343
98.22606
98.23895
98.25596
98.28186
98.28888

93.8532
93.88787
93.85725
93.92893
93.97957
94.14227
94.16824

97.52691
97.5259
97.53509
97.55475
97.55244
97.56816
97.58065

90.98273
91.01998
91.05084
91.08256
91.08324
91.13917
91.16978

95.90232
95.84058
95.76394
95.77654
95.77864
95.78244
95.78632

96.97117
96.97263
96.96484
96.97577
96.96841
96.98133
96.99579

91.64006
91.56066
91.47
91.47785
91.48515
91.49131
91.5103

Table A3: Spillover index, global equity market returns, 1/1/200031/1/2010

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

Canada
88.88889
94.57632
95.26359
95.70162
95.89845
96.03259
96.12752
96.20483
96.27166
96.33285
96.39085
96.44714
96.50253
96.5575
96.61224
96.66685
96.72131
96.77556
96.82951
96.88305
96.93608
96.98849
97.04019
97.09109

United
States
88.90581
89.02114
89.08521
89.15633
89.22566
89.29887
89.37464
89.4527
89.53218
89.61243
89.69283
89.77289
89.85218
89.93036
90.00715
90.08234
90.15575
90.22726
90.29674
90.36415
90.42942
90.49253
90.55348
90.61226

Return Spillover Index (Global Equity Market)

United
Kingdom
Indonesia Japan
Malaysia Philippines
89.38239 89.24877 90.63666 91.01175
91.1538
94.17463 90.30091 92.62948 91.68303
92.24021
95.04604 91.14276 93.43878 92.30454
92.88938
95.50688
91.6765 93.80842 92.75001
93.35771
95.73784 92.03392 94.01078 93.10456
93.69829
95.8954 92.29813 94.14238 93.40518
93.97203
96.01292 92.50888 94.23822
93.672
94.20256
96.11009 92.68567 94.31359 93.91382
94.40327
96.19453 92.83874 94.37605
94.1357
94.58124
96.27077 92.97412 94.42982 94.34082
94.74114
96.34119 93.09567 94.47746 94.53145
94.88619
96.40721
93.206
94.5206 94.70932
95.01874
96.4697 93.30698
94.5603 94.87582
95.1406
96.52917 93.40002 94.59732
95.0321
95.25319
96.58597 93.48618 94.63217 95.17913
95.35764
96.64033 93.56631 94.66525 95.31773
95.4549
96.6924
93.6411 94.69685 95.44861
95.54574
96.74229 93.71111 94.72719 95.57239
95.63083
96.79011 93.77683 94.75645 95.68963
95.71072
96.83593 93.83865 94.78477 95.80081
95.78591
96.87983 93.89694 94.81226 95.90638
95.85681
96.92188 93.95199 94.83902 96.00671
95.92379
96.96213 94.00407 94.86514 96.10218
95.98718
97.00067 94.05342 94.89067
96.1931
96.04727

Singapore
92.68749
94.95065
95.89398
96.43726
96.77776
97.02559
97.2187
97.3768
97.50999
97.62457
97.72465
97.81312
97.8921
97.96317
98.02755
98.08621
98.13994
98.18936
98.23499
98.27728
98.31658
98.35321
98.38743
98.41948

Thailand
92.1841
93.30581
93.90834
94.22408
94.41553
94.54596
94.64462
94.72424
94.79162
94.85056
94.90347
94.95188
94.99686
95.03914
95.07927
95.11764
95.15455
95.19025
95.2249
95.25867
95.29165
95.32395
95.35563
95.38677

Table A4: Spillover index, global equity market volatilities, 1/1/200031/1/2010

1
2
3
4
5
6
7
8

Canada
88.88889
89.7886
90.28893
90.92613
91.46385
91.78662
91.87182
91.77837

United
States
95.08216
95.71725
96.06168
95.63917
95.76304
96.19922
96.31442
96.42034

Volatility Spillover Index (Global Equity Market)

United
Kingdom
Indonesia Japan
Malaysia Philippines
94.40843 90.68394 92.27334 90.95694
92.21537
95.79428 92.24875 93.36412 91.55472
92.52522
95.96127 92.72075
94.945 91.75004
92.93735
96.1487 93.19388
97.3497 91.92751
94.70818
96.81803 93.59353 97.61524 92.06376
95.05589
97.13376 93.75153 97.76043 92.12827
95.13152
97.08603 93.91382 98.21022 92.35509
95.76527
96.95624 93.98618 98.25312 92.63088
95.89901

Singapore
94.87766
96.66165
97.32543
97.71552
98.01701
98.22963
98.40264
98.46782

Thailand
90.17354
90.45443
90.61255
90.90648
91.08398
91.30124
91.46587
91.56444

9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

91.9064
92.06691
92.12419
92.27859
92.30269
92.32313
92.36619
92.43933
92.45789
92.4735
92.49528
92.51593
92.53789
92.56904
92.58479
92.59903

96.45724
96.5334
96.57257
96.59903
96.6162
96.6401
96.65674
96.68289
96.69553
96.70424
96.71869
96.73441
96.74365
96.75075
96.75166
96.75739

96.97408
97.01005
96.99799
97.01178
97.01837
96.99702
97.00063
97.0186
97.00094
97.0245
97.05804
97.0657
97.06413
97.06597
97.06232
97.05668

94.03241
94.15164
94.22417
94.25606
94.26283
94.28131
94.29178
94.32335
94.33705
94.34284
94.34641
94.3613
94.36804
94.3718
94.38019
94.38967

98.2984
98.36472
98.37238
98.37605
98.3671
98.36655
98.36997
98.35706
98.34401
98.3401
98.3185
98.31015
98.30262
98.29624
98.29237
98.2879

92.77421
92.82028
93.17602
93.25082
93.27079
93.28674
93.3091
93.32006
93.33692
93.35613
93.3676
93.37768
93.38773
93.39338
93.39991
93.40216

95.95542
95.97093
96.19563
96.20554
96.21908
96.23542
96.24952
96.25828
96.2731
96.28638
96.2921
96.29797
96.30146
96.30373
96.30959
96.31094

98.5166
98.55838
98.56777
98.57415
98.57336
98.58174
98.59149
98.60885
98.62258
98.62666
98.63672
98.64129
98.64476
98.64888
98.65363
98.65747

91.62726
91.71594
91.76328
91.7894
91.80088
91.81747
91.82487
91.83862
91.85297
91.85605
91.86528
91.87509
91.87863
91.88429
91.89097
91.89363

Spillover Plots A1: Return Spillover Index (Global Currency Market), for 24-period forecasting
98
96
94
92
90
88
86
84

94
93
92
91
90
89
88
87
86
1

9 11 13 15 17 19 21 23

USD

CAD

100

96

98

94

96

9 11 13 15 17 19 21 23

92

94
90

92
90

88

88

86
1

9 11 13 15 17 19 21 23
GBP

9 11 13 15 17 19 21 23
IDR

91.5
91
90.5
90
89.5
89
88.5
88

98
97
96
95
94
93
92
91
90
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23
MYR

JPY

97

98

96

96

95

94

94

92

93
92

90

91

88

90

86
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23

PHP

SGD

92
91
90
89
88
87
1

9 11 13 15 17 19 21 23
THB

Spillover Plots A2: Volatility Spillover Index (Global Currency Market), for 24-period
forecasting

94
93
92
91
90
89
88
87
86

98
96
94
92
90
88
86
84
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23

CAD

USD

100

96

98

94

96

92

94

90

92
90

88

88

86
1

9 11 13 15 17 19 21 23

GBP

98
97
96
95
94
93
92
91
90

9 11 13 15 17 19 21 23
IDR

91.5
91
90.5
90
89.5
89
88.5
88
1

9 11 13 15 17 19 21 23
JPY

9 11 13 15 17 19 21 23
MYR

97
96
95
94
93
92
91
90

98
96
94
92
90
88
86
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23

PHP

SGD

92
91
90
89
88
87
1

9 11 13 15 17 19 21 23
THB

Spillover Plots A3: Return Spillover Index (Global Equity Market), for 24-period forecasting
94
93
92
91
90
89
88
87
86

98
96
94
92
90
88
86
84
1

9 11 13 15 17 19 21 23
CAD

9 11 13 15 17 19 21 23
USD

100

96

98

94

96

92

94
90

92
90

88

88

86
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23

GBP

98
97
96
95
94
93
92
91
90

IDR

91.5
91
90.5
90
89.5
89
88.5
88
1

9 11 13 15 17 19 21 23

JPY

97
96
95
94
93
92
91
90

9 11 13 15 17 19 21 23
MYR

98
96
94
92
90
88
86
1

9 11 13 15 17 19 21 23
PHP

9 11 13 15 17 19 21 23
SGD

92
91
90
89
88
87
1

9 11 13 15 17 19 21 23
THB

Spillover Plots A4: Volatility Spillover Index (Global Equity Market), for 24-period forecasting
98

94
93
92
91
90
89
88
87
86

96
94
92
90
88
86
84
1

9 11 13 15 17 19 21 23

CAD

USD

100

96

98

94

96

9 11 13 15 17 19 21 23

92

94
90

92
90

88

88

86
1

9 11 13 15 17 19 21 23
GBP

9 11 13 15 17 19 21 23
IDR

98
97
96
95
94
93
92
91
90

91.5
91
90.5
90
89.5
89
88.5
88
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23

JPY

MYR

97
96
95
94
93
92
91
90

98
96
94
92
90
88
86
1

9 11 13 15 17 19 21 23

9 11 13 15 17 19 21 23

PHP

SGD

92
91
90
89
88
87
1

9 11 13 15 17 19 21 23
THB