Financial Asset Returns and Volatility Spillovers Across Developed Markets: Evidence From The DCC-GARCH Approach

Yıl 2025, Sayı: 43, 72 - 90, 26.12.2025

Ahmet Usta

https://doi.org/10.26650/ekoist.2025.43.1630251

https://izlik.org/JA44MT56GK

Öz

This paper investigates the volatility spillovers between exchange rates and stock returns across three major developed economies: the United States (US), the Euro area (EA), and the United Kingdom (UK). Using daily data from January 1, 2010, to December 31, 2019, this study employs the Dynamic Conditional Correlation Generalized Autore3 gressive Conditional Heteroscedasticity (DCC3GARCH) framework to capture time3varying conditional correlations and inter3market volatility spillovers across financial asset classes. The analysis further computes optimal hedge ratios and portfolio weights to support risk3minimising investment strategies across asset return pairs within each market. The results reveal that volatility spillovers are not significant between foreign exchange markets; however, they are evident across stock markets. Moreover, dynamic correlations among stock markets are consistently positive, whereas correlations in foreign exchange markets are negative over time. Dynamic hedge ratio estimates indicate that short positions are only feasible in the currency markets. Lastly, the portfolio optimisation analysis reveals that, for a $1 portfolio of exchange rate (stock) returns, the US (UK) asset should dominate the portfolio. These findings offer valuable insights for both academics and practitioners, particularly international investors seeking to understand cross3market volatility dynamics among key global financial centres.

Anahtar Kelimeler

Volatility spillovers , time-varying conditional correlations , optimal portfolio weights and hedge ratios , DCC3GARCH , DCC-GARCH

Kaynakça

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