Dynamic Associated Analysis of Japan´s Stock Market and Exchange Rates: DCC and EGARCH Model

This paper studies the relatedness and the model construction of exchange rate volatility and the Japanese stock market returns. Empirical results show that we can construct a bivariate EGARCH(1, 2) model with a dynamic conditional correlation (DCC) to analyze the relationship of exchange rate volatility and Japan´s stock market returns. The average estimation value of the DCC coefficient for these two markets equals to 0.1375, this result indicates that the exchange rate volatility positively affects the Japanese stock market. Empirical result also shows that there exists an asymmetrical effect on the exchange rate and Japanese stock markets. Based on the good news and bad news of the stock market, the bivariate EGARCH(1, 2) model with a DCC has the better explanation ability compared to the bivariate GARCH(1, 1) model.