Working Paper

Capital flows and Japanese asset volatility

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. Transactions by Japanese residents in foreign bond markets have the most explanatory power among capital flows and that power is much greater in the second subsample.

Keywords: Capital movements; Foreign exchange; Japan;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2011

Number: 2011-034