engleski

Return and volatility spillover between stock prices and exchange rates in Croatia: spillover methodology approach

Relationship between stock returns and exchange rates has been in spotlight for many years now. Research tries to obtain information on the direction of causality between movements in stock prices and exchange rates. Usual line of the approach is to examine flow-oriented or stock-oriented model. The flow-oriented approach explains that changes in exchange rates influence changes in stock prices: depreciation of domestic currency improves local firms’ competiveness and stock prices move up as a response. Stock-oriented model assumes that changes in exchange rates are driven by changes in stock prices, as a consequence of changes of demand and supply of foreign and domestic assets in international portfolios. Researchers examine these concepts due to results being important to policymakers in order to tailor macroeconomic policies which will promote economic growth, but it is important to firms, (potential) investors and investment funds who consider real investment projects, forecast asset’s return and risk, etc. This research will focus on the stock return and exchange rates co-movements in Croatia, by utilizing VAR (Vector AutoRegression) and MGARCH (Multivariate GARCH) approach for the stock market index CROBEX and three exchange rates relative to Croatian Kuna: Euro, American Dollar and Swiss Franck. There exist only several studies in Croatia which deal with mentioned issues. However, this research extends the existing literature twofold. Firstly, this study will observe volatility spillovers between each pair of time series of interest as well (not only return series). Secondly, the study will apply the Spillover Index and Table as defined in Diebold and Yilmaz (2009), which has not yet been examined on the Croatian market. Based upon the results in the empirical research, more insights can be obtained for the relationship between return and volatility of stock market and the exchange rates in Croatia, as well as recommendations for parties of interest.

spillover between markets, spillover index, stock market, exchange rate, Croatia

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