Volatility Spillover influences and Response Asymmetries of Interest Rates, Exchange Rates, and Banking Stock Returns: Evidence from Banks Listed in the Nairobi Securities Exchange

Abstract

This study examines response asymmetries and volatility spillover dynamics of Interest rates, Exchange Rates and returns of a portfolio comprised of Kenyan banks that are listed in the Nairobi Securities Exchange. The study employs [1] Exponential Generalized Auto regressive Conditionally Heteroscedastic (EGARCH) model for empirical modeling. The results suggest the presence of own transmission of returns in the banking sector. Further, they yield evidence of own transmission, high persistence, and asymmetric response of volatility in banking stock returns. Additionally, there is evidence of cross transmission of volatility from exchange rates to banking sector returns. The findings have several policy implications for investors, bank managers, and regulators.