Volatility Spillover Between Foreign Exchange Market and Stock Market in Bangladesh

This paper investigates the link between foreign exchange market and stock market in Bangladesh through volatility spillover between the markets. It also examines the volatility persistence and asymmetric effect of information on the volatility of these two financial markets. Using data from January 1, 2009 to December 12, 2016 Taka/USD exchange rate's volatility and the stock return's volatility of CSE General Index this paper utilizes ARCH and GARCH models to investigate the spillover, persistence and asymmetry effect of volatility. The results reveal high level of presence of volatility of CSE General Index but not of the Taka/USD exchange rate. The result also finds asymmetric effect of information i.e. bad news is followed by higher volatility compared to that of after good news in the stock market. However, the result shows that volatility in the CSE General Index spillover that of the Taka/USD exchange rate but not vice versa. The meaning and significance of the study is also presented in the paper.