Are volatility spillovers between currency and equity market driven by economic states? Evidence from the US economy

•Volatility spillovers between equity and currency markets are time-varying.•Volatility spillovers are high when preceding periods of economic turbulence.•In quiet states, volatility spillover effects are virtually non-existent.•The volatility spillover indices may guide policy actions.

This study examines the volatility spillovers between the foreign exchange rate markets of three of the USA's major trading partners and the US stock market, utilizing the forecast-error variance decomposition framework of a VAR model proposed by Diebold and Yilmaz (2009). The empirical results, based on a data set covering the period 1986-2014 suggest that the level of total volatility spillover effects is high only when they precede periods of economic turbulence. If the economy is quiet, volatility spillover effects are virtually non-existent.