A Study On Volatility Spillover Between Stock Market And Foreign Exchange Market Based On Wavelet Analysis And Copula Model

The volatility spillover effects between financial markets have been the hot issuesin academic circles and financial regulator’s attention for a long time. Last20years, aseries of financial crisis broke out aroud the world, which expressed the feature thatstock market and foreign exchange market collapsed in succession. So the volatilityspillover effects between these two markets received a major concern. The deepening ofRMB exchange rate reform and Chinese enterprise split-share structure reformaccelerates globalization and liberalization of financial markets. It further reinforces theinformation flow and risk transmission between these two markets. Further more, thevolatility spillover feature between them becomes more and more prominent.This paper studies volatility spillover effects from time and frequency domain atthe same time, through combining the wavelet multi-resolution analysis withtime-varying Copula model and introducing Granger causality test. More over, thispaper investigates volatility spillover between these two markets in different trade cycleand describes time-varying character and tail feature of volatility spillover. Thevolatility spillover methods and models, as well as its development are firstly reviewedin this paper. Then the volatility’s connotation is described in detail, also the formationmechanism and transmission mechanism of volatility spillover between stock marketand foreign exchange market are explored. Based on it, this paper explains the researchblue print of volatility spillover effects, including the designing of volatilitymeasurement, basic elements of wavelet analysis, Granger causality test, also theconformation and estimation of Copula model. Finally, the volatility spillover effectsbetween stock market and foreign exchange market are empirically examined exactly.The results show that there is unidirectional volatility spillover from stock market toforeign exchange market in the short-term. However, with the trade cycle increasing, itexists bidirectional volatility spillover effects that gradually increased.