Research On The Spillover Effect Between Foreign Exchange Market And Stock Market Based On MSV Model

The spillover effects between financial markets have been the hot issues indomestic and foreign researchers’ papers, also the financial regulators’ policy. Since1990s, a series of financial crisis exploded in emerging markets, which expressed themain features that foreign exchange market and stock market collapsed in succession.Therefore, the spillover effects between foreign exchange market and stock marketreceived much concerns. With the deepening reform of China’s foreign exchangemanagement system and share-trading, the foreign exchange market and stock marketis gradually return to the market operation. Additionally, with the acceleration ofintegration and liberalization in international financial markets, China’s foreignexchange market and stock market’s spillover effects are gradually increasing.Stochastic volatility model is a discretization of the stochastic differentialequations, which used an unobservable random processor to describe the volatilitycharacteristics of financial series. That is to say, this model is more suitable forpractical research in financial field. Therefore, this paper uses the DC-MSV modeland GC-MSV model to investigate the dynamic price spillover effect and the bilateralvolatility spillover effect between the two important financial markets.In this thesis, the research of spillover effects between foreign exchange andstock markets, as well as the measured models (especially vector stochastic volatilitymodel) are firstly reviewed. And then, the financial market volatility’s meaning andfeature, the definition of price and volatility spillover effects are described in detail.Also, the transmission mechanism and theoretical model of spillover effects betweenforeign exchange and stock markets are discussed. On the basis of above, thefluctuations time series models which measure the market volatility spillover effectsare introduced, especially explained the main features of vector stochastic volatilitymodel and the parameter estimation methods. Finally, the price spillover effectbetween foreign exchange and stock markets are empirically examined, also volatilityspillover effect which divided in accordance with exchange rate trends. The resultsshow that there exist the negative dynamic price spillover effect in whole time regionand asymmetric volatility spillover effect that gradually declined.