Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

- General increase in spillover between equity and exchange rate markets.
- Pure contagion and fundamental contagion explains the increased spillover.
- Increased spillover between FTSE 100, N225 to DJI during global financial crisis.
- Increased spillover from exchange rate markets to DJI during euro debt crisis.

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors' behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.