Transmission of volatility in the interbank foreign exchange markets: evidence from Hong Kong, Japan and Singapore

Abstract

This article investigates short-run interdependence of volatilities between American (or European) and three major Asian foreign exchange markets: Hong Kong, Japan (Tokyo) and Singapore. Using high - frequency Yen/Dollar Reuters FXFX quotes from October 1 , 1992 to September 30, 1993, we find that intraday volatilities differ across the three Asian markets. Volatility spills over from America (or Europe) to Japan and Singapore over the next business day. However, the Hong Kong market tends to be independent of America and Europe over the time period considered. Furthermore , empirical results show that hourly volatilities persist within the Asian region and the persistence appears to be short-lived . Among the three Asian markets, Singapore is the only one to show significant response to the volatility in Australian market. Results lend support to the notion that each regional market in Asia has its unique characteristic such as the relationships with other markets outside the Asian region.