Volatility in financial markets is a highly explored area of research for the last few decades. Possible reasons for high concentration on the markets are its unexplained and unexplored sources. The present study aims to check certain macroeconomic variables as determinants of financial markets (stock market and exchange rate) volatility. It also aims to analyse the contribution of the volatility of one financial market to the volatility of another financial market before and after the financial crises. The analysis is conducted using two types of data sets from 27 European countries. The study employed A.R. (k)-EGARCH (p, q) models to measure financial markets volatility. The study finds no significant interlink effects among volatilities of stock market returns and volatility of exchange rate returns after the financial crises. However, the increase in volatility in one market caused an increase in the other market’s volatility before the financial crises. Further, results also revealed that macroeconomic variables affect volatilities in these markets differently before and after the financial crises. The study recommends that the macroeconomic policies for stability in these markets cannot coincide as they differ in their impacts in different markets.
Keywords: Stock Market, Forex Market, Governance, Volatility Spillover, AR (k)-EGARCH (p, q)