External Shocks and Volatility Overflow among the Exchange Rate of the Yen, Nikkei, TOPIX and Sectoral Stock Indices

Abstract

In this paper, we examined the changes in volatility overflow among the exchange rate of the Japanese yen (JPY), the Nikkei Stock Average (Nikkei), the Tokyo Stock Price Index (TOPIX) and the TOPIX sectoral indices for the period of 10 February 2016 to 24 March 2017. We employed the exponential generalised autoregressive conditional heteroscedasticity (EGARCH) model, the cross-correlation function, and the daily logarithmic returns of JPY, Nikkei, TOPIX and the TOPIX components with a weight of 5% and more in estimations (banks, chemicals, electric appliances, information and communication, machinery and transportation equipment indices). The findings highlighted causality in variance (volatility spillover) among the variables. We revealed that volatility could also spread indirectly among the variables (from one variable to another through a third variable). We demonstrated how the impact of news about the results of the Brexit referendum (BR) and the United States presidential election (USE) in 2016 might spread among the variables indirectly within a week.