Modelling the Interactions Across International Stock, Bond and Foreign Exchange Markets

Abstract

The benefits of investing internationally depend on three conditions, namely cross-country correlations, market volatilities, and future changes in currency risks (see Odier and Solnik (1993)). This paper investigates these conditions for several countries. Many papers have modelled both domestic interactions across asset markets and international interactions in individual asset markets in isolation, but rarely have they examined international interactions across asset markets. The paper fills this gap by modelling the international interactions across stock, bond and foreign exchange markets. Two models that meet these purposes are the VARMA-AGARCH model of McAleer et al. (2009) and the VARMA-GARCH model of Ling and McAleer (2003). The countries that will be modelled in this paper are Australia, Japan, Singapore, New Zealand and USA.