Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

Volatility and correlation in international stock markets and the role of exchange rate fluctuations

This paper develops a direct, explicit model for the role of exchange rate fluctuations in international stock markets and examines how and to what extent volatility and correlations in equity markets are influenced by exchange rate fluctuations. Evidence presented in this paper indicates that a higher foreign exchange rate variability mostly increases local stock market volatility but decreases volatility for the US stock market. The extent to which stock market volatility is influenced by foreign exchange variability is greater for local markets than for the US market, due to the fact that exchange rate changes are more strongly correlated with local equity market returns than the US market returns. We find that a higher exchange rate fluctuation marginally decreases the US/local equity market correlation. While exchange rate fluctuations held a relatively large fraction of the variation in local stock market returns, there was no significant influence on the US/local equity market correlation.     

Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of more than five years of 5‐minute intraday stock index returns for major European stock indices and US macroeconomic surprises, conditional means and volatility behaviour in European markets were investigated. The findings suggest that the opening of the US stock market significantly raises the level of volatility in Europe, all markets responding in an identical fashion. Furthermore, US macroeconomic surprises exert an immediate and major impact on both the European stock markets’ intraday returns and volatilities. Thus, high frequency data appear to be critical for the identification of news impacting the markets.     

Causality in volatility and volatility spillover effects between US, Japan and four equity markets in the South China Growth Triangular

In examining co-movement across international stock markets, previous researchers usually pre-determine the direction of causation and neglect the Chinese equity markets. In this study, we examine the spillover effects of volatility among the two developed markets and four emerging markets in the South China Growth Triangular using Chueng and Ng's causality-in-variance test. Several findings deserve mention: (1) the Japanese stock market affects the US stock market and there is a feedback relationship between the Hong Kong and US stock market. (2) Markets of the SCGT are contemporaneously correlated with the return volatility of the US market. (3) Econometric models constructed according to the results of variance-in-causality tests have greater explanatory power than the conventional GARCH(1,1) model. (4) Using the return volatility of foreign exchange as a proxy for informational arrival can explain excess kurtosis of a stock return series, especially for the less open emerging market. (5) Geographic proximity and economic ties do not necessarily lead to a strong relationship in volatility across markets.     

The Effect of US Stock Market Uncertainty on Emerging Market Returns

We investigate the effects of US stock market uncertainty (VIX) on the stock returns in Latin America and aggregate emerging markets before, during, and after the financial crisis. We find that increases in VIX lead to significant immediate and delayed declines in emerging market returns in all periods. However, changes in VIX explained a greater percentage of changes in emerging market returns during the financial crisis than in other periods. The higher US stock market uncertainty exerts a much stronger depressing effect on emerging market returns than their own-lagged and regional returns. Our risk transmission model suggests that a heightened US stock market uncertainty lowers emerging market returns by both reducing the mean returns and raising the variance of returns. The VIX fears raise the volatility of emerging market returns through generalized autoregressive conditional heteroskedasticity (GARCH)-type volatility transmission processes.     

MEAN AND VOLATILITY SPILLOVERS ACROSS MAJOR NATIONAL STOCK MARKETS: FURTHER EMPIRICAL EVIDENCE

This paper provides additional insight into the nature and degree of interdependence of stock markets of the United States, Japan, the United Kingdom, Canada, and Germany, and it reports the extent to which volatility in these markets influences expected returns. The analysis uses the multivariate GARCH-M model. Although they are considered weak, statistically significant mean spillovers radiate from stock markets of the U.S. to the U.K., Canada, and Germany, and then from the stock markets of Japan to Germany. No relation is found between conditional market volatility and expected returns. Strong time-varying conditional volatility exists in the return series of all markets. The own-volatility spillovers in the U.K. and Canadian markets are insignificant, supporting the view that conditional volatility of returns in these markets is “imported” from abroad, specifically from the U.S. Significant volatility spillovers radiate from the U.S. stock market to all four stock markets, from the U.K. stock market to the Canadian stock market, and from the German stock market to the Japanese stock market. The results are robust and no changes occur in the correlation structure of returns over time.     

The US financial crisis,market volatility,credit risk and stock returns in the Americas

We employ the multivariate DCC-GARCH model to identify contagion from the USA to the largest developed and emerging markets in the Americas during the US financial crisis. We analyze the dynamic conditional correlations between stock market returns, changes in the general economy’s credit risk represented by the TED spread, and changes in the US market volatility represented by the CBOE Volatility Index^® (VIX). Our sample includes daily closing prices from January 1, 2002 to December 31, 2015, for the USA and stock markets in Argentina, Brazil, Canada, Chile, Colombia, Mexico, and Peru. We first identify that increases in VIX have a negative intertemporal and contemporaneous relationship with most of the stock returns, and these relationships increase significantly during the US financial crisis. We then find evidence of significant increases in contemporaneous conditional correlations between changes in the TED spread and stock returns. Increases in conditional correlations during the financial crisis are associated with financial contagion from the USA to the Americas. Our findings have policy implications and are of interest to practitioners since they illustrate that during periods of financial distress, US stock volatility and weakening credit market conditions could promote financial contagion to the Americas.

     

Volatility spillovers between the Chinese and world equity markets

We propose measures of the directional volatility spillovers between the Chinese and world equity markets based on Diebold and Yilmaz's (2011b) forecast-error variance decompositions in a generalized vector autoregressive framework. It was found that the US market had dominant volatility impacts on other markets during the subprime mortgage crisis. The other markets were also very volatile, and driven by bad news, their massive volatilities were transmitted back to the US market. The volatility of the Chinese market has had a significantly positive impact on other markets since 2005. The volatility interactions among the markets of China, Hong Kong, and Taiwan were more prominent than those among the Chinese, Western, and other Asian markets were. The major correction of the Chinese stock market between February and July 2007 significantly contributed to the volatility surges of other markets. Owing to the restrictions on foreign investment, the Chinese stock market was not considerably affected in terms of market volatility during the subprime mortgage crisis.     

Causal relations among stock returns and macroeconomic variables in a small,open economy

We investigate to what extent important results on relations among stock returns and macroeconomic factors from major markets are valid in a small, open economy by utilizing the multivariate vector autoregressive (VAR) approach on Norwegian data. Unlike many previous studies, which use a different methodology on other European markets, we establish several significant links. Consistent with US and Japanese findings, real interest rate changes affect both stock returns and inflation, and the stock market responds accurately to oil price changes. On the other hand, the stock market shows a delayed response to changes in domestic real activity.     

The dynamics of volatility transmission and information flow between ADRs and their underlying stocks

This research examines the dynamics of volatility transmission and information flow between ADRs and the underlying stocks. Using a bivariate GARCH model with BEKK parameterisation, the study investigates how changes in volatility in the ADR market affect the volatility in the underlying equity market and vice versa. The findings suggest a bidirectional volatility transmission and information flow between the ADR and underlying stock markets. ADRs and underlying stocks respond to their own innovations as well as to the innovations in each other's market. The findings are consistent for all countries in the sample as well as for different sub-periods. The evidence suggests that the differences in synchronicity of trading period between the US market and other developed markets included in the sample has had no effect on the volatility transmission and information flow between ADRs and underlying stocks.     

THE OVERNIGHT AND DAILY TRANSMISSION OF STOCK INDEX FUTURES PRICES BETWEEN MAJOR INTERNATIONAL MARKETS

Stock index futures prices for the world's major equity markets, Japan, the UK and the US, are used to examine the interaction of international equity markets. By using stock index futures prices, we avoid the nonsynchronous data problem inherent with opening and closing market averages. We find that the US is the dominant world market; overnight returns in Japan and the UK are greatly influenced by the US daily returns. In contrast, the Japanese market has no impact on the overnight or daily returns in the UK, while the UK daily performance has a small influence on Japanese overnight returns. Slight evidence of over-reaction at the opening of Japanese futures exists as the daily Nikkei returns are negatively related to the US returns.     

Spillovers of stock return volatility to Asian equity markets from Japan and the US

This paper examines the magnitude of return and volatility spillovers from Japan and the US to seven Asian equity markets. I construct a volatility spillover model that deals with the US shock as an exogenous variable in a bivariate EGARCH for Japan and Asian markets. First, only the influence of the US is important for Asian market returns; there is no influence from Japan. Second, the volatility of the Asian market is influenced more by the Japanese market than by the US. Third, there exists an adverse influence of volatility from the Asian market to the Japanese market.     

International stock markets interactions and conditional correlations

This paper investigates the transmission of price and volatility spillovers across the US and European stock markets in bivariate combinations. The framework used encompasses the most popular multivariate GARCH models, with News Impact Surfaces employed for interpretation. By using synchronous data the dynamic conditional correlation model (Engle, R., 2002. Dynamic conditional correlation: a simple class of multivariate GARCH models. Journal of Business and Economic Statistics 20, 339–350) is found to best capture the relationships for over half of the bivariate combinations of markets. Other findings include volatility spillovers from the US to European markets, and a reverse spillover. In addition, the magnitude of the correlation between markets is higher not only for negative shocks in both markets, but also when a combination of shocks of opposite signs occurs.     

Country world betas: The link between the stock market beta and macroeconomic beta

We assess the connection between stock market linkages and macroeconomic linkages by using a world index model. Specifically, we test the association between the stock market beta (the sensitivity of country stock market index to world index) and macroeconomic betas (the sensitivity of national output and inflation to world output and inflation). Output betas account for about 20–26% of the cross-section of stock market betas. Controlling for previously-documented factors affecting stock market comovements: world output volatility is somewhat significant, while inflation betas, trade openness and world stock market volatility are insignificant in accounting for variation in stock market betas.     

Impact of speculation and economic uncertainty on commodity markets

We examine the interactions between commodity futures returns and five driving factors (financial speculation, exchange rate, stock market dynamics, implied volatility for the US equity market, and economic policy uncertainty). Nonlinear causality tests are implemented after controlling for cointegration and conditional heteroscedasticity in the data over the period May 1990 – April 2014. Our results show strong evidence of unidirectional linear causality from commodity returns to excess speculation for the majority of the considered commodities, in particular for agriculture commodities. This evidence casts doubt on the claim that speculation is driving food prices. We also find unidirectional linear causality from energy futures markets to exchange rates and strong evidence of nonlinear causal dependence between commodity futures returns, on the one hand, and stock market returns and implied volatility, on the other hand. Overall, the new evidence found in this paper can be utilized for policy and investment decision-making.     

Where are the sources of stock market mispricing and excess volatility?

Using a simple dividend model, we illustrate and synthesize the sources of stock market mispricing and excess volatility based upon two hypotheses—inflation illusion and heterogeneous beliefs. Our theoretical framework posits that equity mispricing arises when investors have subjective expectations about discount rates or dividend growth rates. We then analyze the sources of equity mispricing and market excess volatility under a VAR framework. Empirically, we find that both inflation illusion and heterogeneous beliefs explain equity mispricing. However, heterogeneous beliefs play a more important role in explaining stock mispricing in the long run. We also find that heterogeneous beliefs cause excess volatility, but inflation illusion does not. Therefore, dispersion in investors’ beliefs is a better explanation of stock market mispricing than the investors’ inability to properly discount future cash flows.     

Cross-border transmission of stock price volatility: evidence from the overlapping trading hours

Using high-frequency (5-minute returns) data, the transmission pattern of intraday volatility among three international stock markets (i.e., the United States, the United Kingdom, and Canada) during their overlapping trading hours (9:30–11:30 a.m. New York time). The major findings are as follows. First, the conditional variance of a domestic market is affected not only by the volatility surprises of its own market, but also by those of foreign markets. This finding holds for the United States as well as for Canada and the United Kingdom, implying that the information contained in the volatility surprises of each national market is clearly transmitted to other national markets. The volatility spillover is not unidirectional. Second, the magnitude of volatility spillover does not decrease monotonically as the lag length increases, indicating that the effect of a foreign volatility shock on the conditional variance of the domestic market tends to persist.     

Volatility linkage across global equity markets

This paper analyzes the volatility linkage across the U.S., European, German, Japanese, and Swiss equity markets from 1999 to 2009. Both the unconditional and conditional correlations exhibit large fluctuations during the sample period. The results from the VAR analysis show an asymmetric two-way relation between the VIX and other market volatility indices, in which VIX has a larger impact in both the tranquil and crisis times. The structure of the volatility correlation before and during the recent global financial crisis does not show significant changes. In addition, robust test results from realized volatilities confirm the results from implied volatility indices.     

Intraday and interday volatility in the Japanese stock market

This paper characterizes the volatility in the Japanese stock market based on a 4-year sample of 5-min Nikkei 225 returns from 1994 through 1997. The intradaily volatility exhibits a doubly U-shaped pattern associated with the opening and closing of the separate morning and afternoon trading sessions on the Tokyo Stock Exchange. This feature is consistent with market microstructure theories that emphasize the role of private and asymmetric information in the price formation process. Meanwhile, readily identifiable Japanese macroeconomic news announcements explain little of the day-to-day variation in the volatility, confirming previous findings for US equity markets. Furthermore, by appropriately filtering out the strong intradaily periodic pattern, the high-frequency returns reveal the existence of important long-memory interdaily volatility dependencies. This supports recent results stressing the importance of exploiting high-frequency intraday asset prices in the study of long-run volatility properties of asset returns.     

A multilateral approach to examining the comovements among major world equity markets

This study investigates the comovement in stock indices among major developed markets, where Morgan Stanley Capital International (MSCI) indices are employed for the purposes of the study. We employ a model that accommodates multilateral international impacts on equity index movements. The empirical results reveal the existence of significant international transmission effects among these major world markets, both in terms of returns and volatility, and mostly in a positive direction. The U.S. market, as expected, is the leading market in the sense that it has the most pervasive and significant impact on all markets across continents. However, the U.S. market exhibits a different relationship with European markets from that with Asia-Pacific markets. The evidence also suggests that strong regional transmission effects exist. A further investigation using the extended model reveals that the linkages between U.S. and European markets are driven by positive global common forces and by negative international competitive effects. On the other hand, the U.S. and Asian markets are linked through positive global common forces and positive international contagion effects. The United States, Canada, and the U.K. are the three markets that still demonstrate contagion influence over countries outside its own region. The Asia-Pacific markets are more susceptible to contagion effects. Finally, it is interesting to find that Japanese market performance became more contagious toward other markets during the Asian financial crisis period.