Testing for causality‐in‐variance: an application to the East Asian markets

Abstract

Abstract In this paper we provide some empirical evidence on the casual relationship between stock prices and exchange rates volatility in four East Asian countries. In order to test for causality‐in‐variance, we use a GARCH model for which a BEKK representation is adopted, and then test for the relevant zero restrictions on the conditional variance parameters. We find that in the pre‐crisis sample stock prices lead exchange rates negatively in Japan and South Korea (consistently with the portfolio approach) and positively in Indonesia and Thailand. In the latter two countries after the onset of the 1997 East Asian crisis the spillover effects are found to be bidirectional. Copyright © 2002 John Wiley & Sons, Ltd.