Volatility Spillovers between Stock Market Returns and Exchange Rate Changes: the New Zealand Case

Kanas (2000) first examines volatility spillovers between stock market returns and exchange rate changes on six developed countries: the US, Canada, Japan, the UK, France, and Germany. He finds that, for all countries, spillovers from exchange rate changes to stock market returns are insignificant. On the other hand, spillovers from stock market returns to exchange rate changes are significant for all countries except Germany. New Zealand (NZ) is a small market which is characterized by down-markets and is impacted by international movements. In this paper, it is found that, for NZ data, when the exchange rate volatility is higher, the stock market volatility is lower before the 1997 stock market crash. However, this volatility spillover becomes significantly positive after the crash. On the other hand, we find significant volatility spillovers from stock market returns to NZ dollar movements in the foreign exchange market only before the 1997 crash but not after, i.e., volatility spillovers between exchange rate changes and stock market returns change over time.