RDP 9301: The Response of Australian Stock, Foreign Exchange and Bond Markets to Foreign Asset Returns and Volatilities 5. Conclusion

Recent research has suggested that volatility in one nation's asset markets may be translated into volatility in the markets of other nations through ‘contagion’ effects. These contagion effects reflect both information problems and an inability to take advantage of possible asset price misalignment. This paper represents an attempt to use some recently developed time-series techniques to analyse the relationship between the volatility of Australian asset markets and those abroad.

The empirical results show that the stock, foreign exchange, and bond markets in Australia have adjusted in different ways to international volatilities and asset returns. Volatility in the UK stock market is closely related to Australian stock price volatility. The volatility of the Canadian dollar/US dollar helps predict Australian dollar/US dollar volatility and German long-term bond-yield volatility is most closely related to Australian long-term bond volatility. More detailed exploration of the sources of these correlations is a topic of future research.