Return and Volatility Spillovers in East Asian Currency Markets: A Generalized Variance Decomposition Analysis

This study investigates the nature and extent of return and volatility spillovers among 10 East Asian exchange rates using the variance decomposition results from a generalized VAR and the corresponding generalized spillover index given by Diebold and Yilmaz (2012), which overcomes the drawbacks generally found in identification schemes of variance decompositions. Several results are remarkable. First, the spillovers have increased dramatically, but fluctuate periodically. The upward trend of spillovers is consistent with a continuous increase in financial market integration. Second, the return and volatility spillovers show large variability over time and are positively associated with extreme economic episodes, such as the Asian crisis of 1997, the dollar crisis of 2005, the global financial crisis of 2008‐2009, and the ongoing European debt crisis. Third, the time‐varying patterns of the return and volatility spillovers are very different across exchange rates. For example, the Korean won has been experienced the most dramatic increase in the return spillover from others, and the Singapore dollar is the most dominant net transmitter of return spillover, hence playing the role of a leader. These results have important implications for exchange rate forecast, risk management, central bank interventions and international trade.