Assessing Interest Rate and Exchange Rate Effects on Equity Market Volatility: The Case of the US, UK, and Germany

Abstract

This paper empirically establishes the significance of a limited set of variables that contribute to the volatility of international equity markets. A more complete understanding of the empirical relations between measures of macroeconomic activity and equity market volatility allows market participants to better anticipate periods of market vol~tility and liquidity changes, and this understanding allows pohcy makers to forecast the sometimes undesirable consequences of their actions. We produce evidence which suggests exchange rate movements and relative interest rates are important determinanta of domestic equity market volatility.