Capital Flows and Japanese Asset Volatility

Federal Reserve Bank of St. Louis Working Paper No. 2011-034B

37 Pages Posted: 12 Apr 2012

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Brett Fawley

Federal Reserve Bank of Saint Louis

Date Written: December 22, 2011

Abstract

Characterizing asset price volatility is an important goal for financial economists. The literature has shown that variables that proxy for the information arrival process can help explain and/or forecast volatility. Unfortunately, however, obtaining good measures of volume and/or order flow is expensive or difficult in decentralized markets such as foreign exchange. We investigate the extent that Japanese capital flows — which are released weekly — reflect information arrival that improves foreign exchange and equity volatility forecasts. We find that capital flows can help explain transitory shocks to GARCH volatility.

Keywords: volatility, capital flows, GARCH, exchange rates

JEL Classification: F31, F32

Suggested Citation

Neely, Christopher J. and Fawley, Brett, Capital Flows and Japanese Asset Volatility (December 22, 2011). Federal Reserve Bank of St. Louis Working Paper No. 2011-034B, Available at SSRN: https://ssrn.com/abstract=2038613 or http://dx.doi.org/10.2139/ssrn.2038613

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://research.stlouisfed.org/econ/cneely/sel

Brett Fawley

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States