Spillovers from stock markets to currency markets: Evidence from Copula-CoVar with time-varying higher moments

Abstract

This study analyses the relationship between equites and foreign exchange markets by employing a conditional value at risk (CoVaR) framework for developed and developing economies accounting for an upside or downside shock, greater or equal to their VaRs. The CoVaR of currency returns conditional on both, the local equity and SP500 index are significant and greater than their unconditional VaRs for most currencies. The ∆CoVaRs for currency market conditional on the local stock index are greater than those conditional on the SP500, showing that local stock index provides greater contributions to the shocks in currency returns compared to the SP500 index. Our findings have important implications for developing cross-market and cross-border hedging strategies.