This study aims to
investigate the interactions, volatility spillovers and smooth transition
effects between stock and foreign exchange markets in
emerging versus developed countries by the Smooth Transition Vector Error Correction-Smooth
Transition GARCH with Dynamic Conditional Correlation model (STVE-STGARCH-DCC).
The empirical results yield several findings. Firstly, boom stock
markets in emerging countries will trigger their domestic currency
appreciation, while prosperous stock markets in developed countries result in
currency depreciation. Secondly, the conditional variances for stock markets
mainly result from unexpected shocks, past volatility, and short-term impact
effects, thus leading to a persistence of volatility in both emerging and
developed markets. The conditional variances for foreign exchange markets
display similar patterns but show weaker short-term impact effects and slower
transition speeds. Thirdly, unexpected shocks in a stock market broadly affect
its own stock volatility, while those only affect India’s volatility in the
rupee market. In contrast, unexpected shocks in foreign exchange markets mainly
affect foreign exchange volatility, except for India; however, those influence
their stock volatility only for emerging countries, such as India and South
Africa. Lastly, developed markets are more efficient than emerging markets are.
JEL classification numbers: C32,
C51, C52, G11, G15
Keywords: Asymmetric Effects,
Bivariate STVEC-STGARCH-DCC, Market Efficiency, Nonlinear Model, Smooth
Transition Auto-regression, ICSS Algorithm.