The comovement between exchange rates and stock prices in the Asian emerging markets

This study investigates the comovement between exchange rates and stock prices in the Asian emerging markets. The sample covers major institutional changes, such as market liberalization and financial crises, so as to examine how the short-term and long-term relations change after such events. The autoregressive distributed lag (ARDL) model proposed by Pesaran et al. (2001) is adopted, which allows us to deal with structural breaks easily, and to handle data that have integrals of different orders. Interest rates and foreign reserves are also included in the analysis to reduce potential omitted variable bias. My empirical results suggest that the comovement between exchange rates and stock prices becomes stronger during crisis periods, consistent with contagion or spillover between asset prices, when compared with tranquil periods. Furthermore, most of the spillovers during crisis periods can be attributed to the channel running from stock price shocks to the exchange rate, suggesting that governments should stimulate economic growth and stock markets to attract capital inflow, thereby preventing a currency crisis. However, the industry causality analysis shows the comovement is not stronger for export-oriented industries for all periods, such as industrials and technology industries, thus implying that comovement between exchange rates and stock prices in the Asian emerging markets is generally driven by capital account balance rather than that of trade.     

我国证券市场流动性溢出效应的实证研究

2008年金融危机中的一个重要金融现象是流动性溢出效应.本文以我国沪深两市交易的国债和股票为样本,利用VAR技术分析了股票市场与债券市场之间的流动性溢出效应问题.由于我国股票市场的规模远大于交易所交易债券,我们发现存在显著的股市流向债市的流动性溢出效应,而债市流向股市的流动性溢出效应统计上却不显著.同时我们发现各个市场自身的收益率和波动率对其流动性也有着显著的影响.最后我们还发现两市自身的流动性存在着很强的自相关性.证据表明当我国资本市场出现流动性不足时,尤其要加强对股票市场流动性风险的防范和监管.同时也反映出我国要大力发展债券市场的必要,使股市和债市的流动性相互影响相得益彰.     

Evidence for Financial Contagion in Endogenous Volatile Periods

The objective of this study is to analyze cross‐border contagious dynamics in both foreign exchange markets and stock exchange markets. Propagation is analyzed with respect to the transmission of excessive volatility that is endogenously determined. The contagion process is discussed in the context of financial systems, foreign direct investments and trade. Implementing a vector autoregressive‐multivariate generalized autoregressive conditional heteroskedasticity (VAR‐MGARCH) model, we show that country‐specific turbulence in financial markets is able to create unanticipated financial contagion across countries. Diversified trade and financial relations decrease the risk of exposure to contagion from external markets. The world's largest economies, however, play a price‐setter role, and diversification is of secondary importance. Asymmetric transmission of the empirically predicted contagion prevails in the latter case.     

Impacts of China's crash on Asia-Pacific financial integration: Volatility interdependence,information transmission and market co-movement

This paper examines the price and volatility dynamics between China and major stock markets in the Asia-Pacific, investigating the effects of the Chinese stock market crash (2015–2016) for the first time. Employing the Bayesian VAR and BEKK GARCH, we observe that price and volatility spillover behaviours are different during the stable and stress periods. Particularly, price spillovers from China to other regional markets are more significant during a bullish period, showing that ‘good news’ emanating from China has strong impacts on its neighbours during better market condition. In the turbulent period, we observe strong shock spillover effects and enhanced volatility spillovers from China to most Asia-Pacific stock markets. This is because China, as an important trading partner and strategic financial centre shows to exert significant influence on the Asia-Pacific region through various economic channels. We also find that the Asia-Pacific stock markets spill over their shocks to China during the crisis, indicating that China is becoming more integrated with the regional financial markets.     

News and correlations of CEEC-3 financial markets

We employ DCC-MGARCH models to investigate conditional correlations between six CEEC-3 financial markets. In general, the highest correlations exist between Hungary and Poland in foreign exchange and stock markets. Short-term money markets are somewhat isolated from each other. We find that the associations of CEEC-3 exchange rates versus euro are weaker than those versus the US dollar. The persistence of the effect of shocks on the time-varying correlations is strongest for foreign exchange and stock markets, indicating a tendency toward contagion. In searching for the origins of financial market volatility in the CEEC-3, we uncover some evidence of Granger-causality on the foreign exchange markets. Finally, using a pool model, we investigate the impact of euro area, US, and CEEC-3 news on the correlations. Apart from ECB monetary policy news, we observe no broad effects of international news on correlations; instead, local news exerts an influence, which suggests a dominance of country- or market-specific circumstances.     

Determinants of stock market comovements among US and emerging economies during the US financial crisis

By analyzing the dynamic conditional correlations (DCC) of the daily stock returns of 10 emerging economies in comparison with those of the US for the period of 2006–2010, we find different patterns of crisis spillover among 10 emerging economies. While a group of countries has three distinctive phases of crisis spillover (contagion, herding, and post-crisis adjustment), other groups show different phases of crisis spillover. It is also shown that increases in CDS spread and TED spread decrease conditional correlations while increases in foreign institutional investment, exchange market volatility, and the VIX index of the S&P 500 increase conditional correlations.     

Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors’ behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.     

Evidence of cross-asset contagion in U.S. markets

This study examines evidence of cross-asset contagion among REIT, money, stock, bond, and currency markets in the US from 2006 to 2012, which covers the subprime and European sovereign debt crisis. We apply the Granger causality test and a vector auto-regression to examine the change of causality structure. Our results show that contagion exists from medium-term bond markets to equity markets; REIT, money markets and short-term bond markets show little evidence of cross-asset contagion with other markets; and the currency market shows high co-movement and contagion with equity markets. Our findings provide more rewarding asset reallocating strategies for the investors who invest in both bond and equity markets before a crisis to consider reallocating their portfolio into REIT and money markets to benefit from diversification during a crisis period.     

The source of global stock market risk: A viewpoint of economic policy uncertainty

This study explores the effect of economic policy uncertainty (EPU) in four countries or regions (China, Japan, Europe, and the United States) on the contagion risk of investments in the global stock market. The stock returns of 22 stock markets worldwide are analyzed to determine which region’s EPU exhibits the greatest effect on regional systematic risk in the global stock market and on volatility risk in individual stock markets. First, all of the samples, the markets of different continents and the spillover indices of the developed and emerging markets, are calculated to observe the dynamic correlation among these markets with the aim of quantifying regional systematic risk and further examining the contagion risk effect of EPU. The results indicate the following: EPU in China is the most influential, and its contagion risk spreads to different regional markets, except for Europe; the effect of EPU in the United States is inferior to that in China; EPU in Japan merely influences contagion risk in emerging markets; contagion risk in European markets is not influenced by the four EPU indices; and EPU in Europe is not influenced by contagion risk in the global stock market. However, according to the volatility risk in each market, the EPU in Europe and China respectively influence Asian countries and European countries the most. These results may be attributable to the extremely high trade dependence among these countries because the performance of international enterprises is mainly determined by the economic policies of their trading partners.     

Volatility transmission between Islamic and conventional equity markets: evidence from causality-in-variance test

This study examines whether a volatility/risk transmission exists between the Dow Jones Islamic stock and three conventional stock markets for the United States, Europe and Asia during the pre- and the in- and post-2008 crisis periods. It also explores the volatility spillover dynamics between those markets and US Monetary policy, oil prices, global financial risk and uncertainty factors. The recently developed Hafner and Herwartz (2006)’s causality-in-variance test provides evidence of risk transfers between these seemingly different equity markets, indicating a contagion between them during the full sample and the subperiods. The volatility structure of these markets is dominated by short-run volatility in the first period and by high long-run volatility in the second period. The volatility impulse response analysis indicates a similar volatility transmission pattern although it is characterized by a more volatile and short-lived structure in the second period. It also appears that the Islamic equity market responds to shocks from the risk factors and not from the oil price and the US economic policy uncertainty index during both periods.     

The linkages,persistence, asymmetry in the volatility,the price discovery and efficiency,and the effect of the US subprime mortgage financial crisis on the spot and the futures market’s returns: the case of India

This article examines the effects of persistence, asymmetry and the US subprime mortgage crisis on the volatility of the returns and also the price discovery, efficiency and the linkages and causality between the spot and futures volatility by using various classes of the ARCH and GARCH models, and through the Granger’s causality. We have used two indices: one for spot and the other for futures, for the daily data from 12 June 2000 to 30 September 2013 from Nifty stock indices. We have then tested for ARCH effects, and subsequently employed various models of the ARCH and GARCH conditional volatility. The GARCH(1,1) model is found to be significant, and it implies that the returns are not autocorrelated and have ‘short memory’. It supports the hypothesis of the efficiency of the markets. The negative ‘news’ has more significant effect on volatility, corroborating the ‘leverage impact’ in finance on market volatility. We have also tested the volatility spillover effects. The two methods we employed support the spillover effects and the causality is bidirectional. We also have used the dummy variable for the US subprime mortgage financial crisis and found that they are statistically significant. Indian stock market is thus integrated to the world stock markets.     

Volatility transmission between stock and foreign exchange markets: a connectedness analysis

ABSTRACT

This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to May 2018. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each market. To gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness during the financial turmoil periods experienced in the sample period Our results suggest that slightly more than half of the total variance of the forecast errors is explained by shocks across markets rather than by idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.     

Co-movement and spillovers: empirical evidence from BRIC equity markets

A higher degree of co-movement and spillover effects among different asset classes undermine portfolio diversification benefits. In this regard, the present study attempts to capture dynamic co-movement and return-volatility spillover effects among the most promising emerging equity markets, i.e. Brazil, Russia, India and China in a multivariate framework by employing VAR-ABEKK and VAR-DCC-AGARCH (1,1) models. To further comprehend the behaviour of the correlation coefficients during the global financial crisis period (2007–2009), heat map and Markov regime switching model (two regimes with a switch at ‘mean’ level only) have been used. The results report that the BRIC equity markets do not share a common stochastic trend in the long run. There is strong evidence of market shocks to volatility, volatility to volatility and negative shocks to volatility spillover effects among the BRIC markets. Overall, the BRIC markets are partially integrated with each other, thereby making them stronger investment candidates.     

Correlations and volatility spillovers across commodity and stock markets: Linking energies,food, and gold

This paper employs a VAR-GARCH model to investigate the return links and volatility transmission between the S&P 500 and commodity price indices for energy, food, gold and beverages over the turbulent period from 2000 to 2011. Understanding the price behavior of commodity prices and the volatility transmission mechanism between these markets and the stock exchanges are crucial for each participant, including governments, traders, portfolio managers, consumers, and producers. For return and volatility spillover, the results show significant transmission among the S&P 500 and commodity markets. The past shocks and volatility of the S&P 500 strongly influenced the oil and gold markets. This study finds that the highest conditional correlations are between the S&P 500 and gold index and the S&P 500 and WTI index. We also analyze the optimal weights and hedge ratios for commodities/S&P 500 portfolio holdings using the estimates for each index. Overall, our findings illustrate several important implications for portfolio hedgers for making optimal portfolio allocations, engaging in risk management and forecasting future volatility in equity and commodity markets.     

Return spillovers around the globe: A network approach

We study the connectedness of a sample of 40 stock markets across five continents using daily closing prices and return spillovers based on Granger causality. All possible 1560 return spillovers between 40 markets create a complex network of relationships between equity markets around the world. Apart from analyzing the topological and time-varying properties of the created networks, we also identify the determinants of the connectedness of equity markets over time. Adjusting for non-synchronous trading, our modelling approach leads to evidence that the probability of return spillover from a given stock market to other markets increases with market volatility and market size and decreases with higher foreign exchange volatility. We empirically show that the temporal proximity between closing hours is important for information propagation; therefore, choosing markets that trade during similar hours bears an additional risk to investors because the probability of return spillovers increases.     

Spillover effects of the 2008 financial crisis on NIE stock markets

This article estimates dynamic conditional correlations of stock returns across countries by using DCC–GARCH model and analyse spillover effects of the 2008 financial crisis on the NIE’s stock markets. The results show that there is no regime shift in mean equation of the correlation coefficient during the financial crisis. It may imply there are no mean spillover effects of the US financial crisis on the NIE’s stock markets. However, there are volatility spillover effects of the financial crisis sparked in 2008 from the US to the NIE’s markets.     

Hedging and diversification across commodity assets

ABSTRACT

We investigate the conditional cross effects and volatility spillover between equity markets and commodity markets (oil and gold), Fama and French HML and SMB factors, volatility index (VIX) and bonds using different multivariate GARCH specifications considering the potential asymmetry and persistence behaviours. We analyse the dynamic conditional correlation between the US equity market and a set of commodity prices and risk factors to forecast the transmission of shock to the equity market firstly, and to determine and compare the optimal hedge ratios from the different models based on the hedging effectiveness of each model. Our findings suggest that all models confirm the significant returns and volatility spillovers. More importantly, we find that GO-GARCH is the best-fit model for modelling the joint dynamics of different financial variables. The results of the current study have implications for investors: (i) the equity market displays inverted dynamics with the volatility index suggesting strong evidence of diversification benefit; (ii) of the hedging assets gold appears the best hedge for the US equity market as it has a higher hedge effectiveness than oil and bonds over time; and (iii) despite these important results, a better hedge may be obtained by using well-selected firm sized and profitability-based portfolios.     

P2P网络借贷市场对资本市场的风险溢出效应

构建Copula-GARCH模型,并利用2013—2016年中国P2P网络借贷市场、股票市场和债券市场的日收益率数据,实证研究了P2P网络借贷市场对资本市场的风险溢出效应。结果显示:P2P网络借贷市场与股票市场之间存在"跷跷板"效应,与债券市场之间呈现出较弱的联动效应;P2P网络借贷市场与股票市场和债券市场的上、下尾部相关性均很弱,风险溢出效应不显著。结论表明:在确保金融系统稳定的同时,中国可以适度发展P2P网络借贷行业。     

FINANCIAL CRISES AND INTERNATIONAL STOCK MARKET VOLATILITY TRANSMISSION

This paper examines the interplay between stock market returns and their volatility, focusing on the Asian and global financial crises of 1997–98 and 2008–09 for Australia, Singapore, the UK, and the US. We use a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model and weekly data (January 1992–June 2009). Based on the results obtained from the mean return equations, we could not find any significant impact on returns arising from the Asian crisis and more recent global financial crises across these four markets. However, both crises significantly increased the stock return volatilities across all of the four markets. Not surprisingly, it is also found that the US stock market is the most crucial market impacting on the volatilities of smaller economies such as Australia. Our results provide evidence of own and cross ARCH and GARCH effects among all four markets, suggesting the existence of significant volatility and cross volatility spillovers across all four markets. A high degree of time‐varying co‐volatility among these markets indicates that investors will be highly unlikely to benefit from diversifying their financial portfolio by acquiring stocks within these four countries only.     

What can wavelets unveil about the vulnerabilities of monetary integration? A tale of Eurozone stock markets

The study has two main objectives: (i) to investigate whether there is pure contagion or fundamental-based contagion/interdependence among the Eurozone equity markets (Germany, France, Italy, Spain and Netherlands), attributable to the shocks stemming from nine major crises around the world (ii) to investigate the evolution of market integration, whether mainly short-run or long-run. Wavelet decompositions, in both its discrete and continuous forms, are employed to unveil the multi-horizon nature of co-movements, volatility and lead–lag relationships. This is to unveil the path of linkages and the behavior underlying the transmission mechanism of financial shocks across major Eurozone stock markets. Evidence also supports the presence of common shocks whereby equity markets in Eurozone are significantly affected by episodic crisis events globally. Prior to the recent subprime crisis, contagion effects have generated short-term shocks that may potentially involve, among other factors, excessive channels. In stark contrast, the most recent US subprime crisis and EMU sovereign debt crisis reveal the evidence of fundamental-based contagion. We also find the increasing short-run and long-run stock market integration, driven by several stages of the establishment of EMU. Policy implications for regulators and investors are discussed in the context of continued monetary integration.