Volatility Reversion and Correlation Structure of Returns in Major International Stock Markets

This paper investigates the stochastic behavior of weekly stock market returns in the U.S., Japan, and the U.K. during the period 1984 to 1994. The analysis is carried out using an augmented version of Bollerslev's [7] multivariate GARCH model with structural dummies to test for differences in the mean, volatility, and covariance structure of returns during the pre- and post-October 1987 crash periods. In addition, the paper explores the issue of the volatility reversion and time-varying behavior of correlation structure of returns in these markets. Mean-spillovers exist from the U.S. and Japan to the U.K. The magnitude of these spillovers is, however, low. Volatility spillovers exist from the U.S. and, to a lesser extent, from Japan to the U.K. Mean returns in all three markets and volatility in Japan and the U.K. are the same during the two periods, while volatility in the U.S. is lower during the post-crash period. With the exception of the correlation of returns between Japan and the U.K., which has doubled since the October 1987 crash, the remaining correlations are statistically similar during the two periods. Simulations performed indicate that volatility is reverting in the sense that, when it departs from its long-run equilibrium level, it tends to revert back to that level.     

Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence

We investigate interdependencies between stock returns and exchange rate changes for six industrialised countries, namely the US, the UK, Japan, Germany, France and Canada, by testing for volatility spillovers using a bivariate EGARCH model. Volatility spillovers from stock returns to exchange rate changes are found for all countries except Germany. These spillovers are symmetric in nature. No evidence is found of volatility spillovers from exchange rate changes to stock returns for any country. Spillovers from stock returns to exchange rate changes have increased since October 1987. This finding is consistent with the notion that international financial markets have become increasingly integrated.     

Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence

We investigate interdependencies between stock returns and exchange rate changes for six industrialised countries, namely the US, the UK, Japan, Germany, France and Canada, by testing for volatility spillovers using a bivariate EGARCH model. Volatility spillovers from stock returns to exchange rate changes are found for all countries except Germany. These spillovers are symmetric in nature. No evidence is found of volatility spillovers from exchange rate changes to stock returns for any country. Spillovers from stock returns to exchange rate changes have increased since October 1987. This finding is consistent with the notion that international financial markets have become increasingly integrated.     

Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan. This revised version was published online in August 2006 with corrections to the Cover Date.     

Price and Volatility Spillovers in the Case of Stock Markets Located in Different Time Zones

This paper investigates the interdependence of price volatility across the U.S. stock market and two emerging markets: Poland and Hungary. Using daily data for countries located in different time zones, we point out the problems caused by the presence of nonsynchronous trading effects. To address this problem we use open-to-close logarithmic returns of major stock market indexes. The asymmetric impact of good and bad news is described by a multivariate exponential general autoregressive conditional heteroskedastic model. We investigate the sample from May 2004 to December 2011. The evidence is that the U.S. prices spill over to other markets. Our results show no pronounced volatility spillovers among the three examined markets. Moreover, we observe the presence of negative asymmetry in the case of all markets.     

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.     

The determination and international transmission of stock market volatility

This paper extends the literature on low-frequency analysis of the causes and transmission of stock market volatility. It uses end-monthly data on stock market returns, interest rates, exchange rates, inflation, and industrial production for five countries (Britain, France, Germany, Japan, and the US) from July 1973 to December 1994. Efficient portfolios of world, European, and Japanese/US equity are first constructed, the existence of multivariate cointegrating relationships between them is demonstrated, and the transmission of conditional volatility between them is described. The transmission of conditional volatility from world equity markets and national business cycle variables to national stock markets is then modeled. Among the main findings are: first, world equity market volatility is caused mostly by volatility in Japanese/US markets and transmitted to European markets, and second, changes in the volatility of inflation are associated with changes of the opposite sign in stock market volatility in all markets where a significant effect is found to exist. To the extent that the volatility of inflation is positively related to its level, this implies that low inflation tends to be associated with high stock market volatility.     

Granger-causality in quantiles between financial markets: Using copula approach

This paper considers the Granger-causality in conditional quantile and examines the potential of improving conditional quantile forecasting by accounting for such a causal relationship between financial markets. We consider Granger-causality in distributions by testing whether the copula function of a pair of two financial markets is the independent copula. Among returns on stock markets in the US, Japan and U.K., we find significant Granger-causality in distribution. For a pair of the financial markets where the dependent (conditional) copula is found, we invert the conditional copula to obtain the conditional quantiles. Dependence between returns of two financial markets is modeled using a parametric copula. Different copula functions are compared to test for Granger-causality in distribution and in quantiles. We find significant Granger-causality in the different quantiles of the conditional distributions between foreign stock markets and the US stock market. Granger-causality from foreign stock markets to the US stock market is more significant from UK than from Japan, while causality from the US stock market to UK and Japan stock markets is almost equally significant.     

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.     

A Conditional Assessment of the Relationships between the Major World Bond Markets

This paper uses a bivariate GARCH framework to examine the lead‐lag relations and the conditional correlations between 10‐year US government bond returns and their counterparts from the UK, Germany, and Japan. We find that while mean and volatility spillovers exist between the major international bond markets, they are much weaker than those between equity markets. The results also indicate that the correlations between the US and other major bond market returns are time varying and are driven by changing macroeconomic and market conditions. However, in contrast to the finding that the benefits of international diversification in equity markets evaporate during high‐stress periods, we find that the benefits of diversification across major government bond markets do not decrease during periods of extremely high bond market volatility or following extremely negative US and foreign bond returns.     

The Stochastic Properties of Major Canadian Exchange Rates

This paper extends the results of Akgiray and Booth [2] on the stochastic properties of five major Canadian exchange rates using the EGARCH-M model along with the generalized error distribution (GED). In addition to the issue of first- and second-order dependencies, explored by the authors, the paper (1) addresses the issue of asymmetric volatility, (2) examines the extent to which volatility affects future movements in these exchange rates, (3) measures the amount of kurtosis in the data, and (4) investigates the transmission mechanism of innovations and volatility shocks across the five Canadian exchange rate markets. The five Canadian dollar exchange rates are for the U.S. dollar, the Japanese yen, the British pound, the German mark, and the French franc. Changes in Canadian exchange rates are conditionally heteroskedastic, a finding which is in line with that of Akgiray and Booth [2]. There is no evidence supporting the assertion that volatility triggers such changes. The hypothesis of asymmetric volatility is rejected for all Canadian exchange rates; thus unexpected appreciations and depreciations of the Canadian currency have similar impact on future volatility of these exchange rates. Innovations in the Canadian exchange rate markets for the U.S. dollar, the British pound, and French franc influence the Japanese yen market, while innovations in the markets of the British pound and German mark influence the French franc market. Significant but negative volatility spillovers radiate from the German mark market to the U.S. dollar market and from the French franc market to the German mark market, resulting in lower levels of volatility in both the U.S. and German markets. The distributions of all five series of Canadian exchange rates are highly leptokurtic relative to the normal distribution. The GED distribution provides a good characterization of these distributions.     

Financial crises,price discovery,and information transmission: a high-frequency perspective

This paper examines the price discovery processes before and during the 2007–2009 subprime and financial crisis, as well as the subsequent European sovereign crisis, for American and German stock and bond markets, as well as for U.S. Dollar/Euro FX. Based on 5-s intervals, we analyze how asset prices interact conditional on macroeconomic announcements from the USA and Germany. Our results show significant co-movement and spillover effects in returns and volatility, reflecting systematic information transmission mechanisms among asset markets. We document strong state dependence with a substantial increase in inter-asset spillovers and feedback effects during times of crisis.     

The day of the week effect on stock market volatility and volume: International evidence

This study investigates the day of the week effect on the volatility of major stock market indexes for the period of 1988 through 2002. Using a conditional variance framework, we find that the day of the week effect is present in both return and volatility equations. The highest volatility occurs on Mondays for Germany and Japan, on Fridays for Canada and the United States, and on Thursdays for the United Kingdom. For most of the markets, the days with the highest volatility also coincide with that market's lowest trading volume. Thus, this paper supports the argument made by Foster and Viswanathan [Rev. Financ. Stud. 3 (1990) 593] that high volatility would be accompanied by low trading volume because of the unwillingness of liquidity traders to trade in periods of high stock market volatility.     

Firm size and volatility analysis in the Spanish stock market

Using Spanish stock market data, this paper examines volatility spillovers between large and small firms and their impact on expected returns. By using a conditional capital asset pricing model (CAPM) with an asymmetric multivariate GARCH-M covariance structure, it is shown that there exist bidirectional volatility spillovers between both types of companies, especially after bad news. After estimating the model, a positive and significant price of risk is obtained. This result is consistent with the volatility feedback effect, one of the most popular explanations of the asymmetric volatility phenomenon, and explains why risk premiums are much more sensitive to negative return shocks coming from the whole market or other related markets.     

Shock and Volatility Transmission in the Futures and Spot Markets: Evidence from Turkish Markets

This paper examines the volatility transmission mechanism between the futures and corresponding underlying asset spot markets, focusing on Turkish currency and stock index futures traded on the lately established Turkish Derivatives Exchange (TURKDEX). Employing multivariate generalized autoregressive conditional heteroskedasticity modeling, which allows for potential spillovers and asymmetries in the variance-covariance structure for the market returns, the paper investigates the volatility interactions among each of the three futures-spot market systems. For all market systems under study, the volatility spillovers are found to be important and bidirectional. For the stock index market system, in line with the previous literature, volatility shows asymmetric behavior and strong asymmetric shock transmission. The main implication is that investors need to account for volatility spillovers and asymmetries among the futures and the spot markets to correctly build hedging strategies.     

Dynamic analysis of stock return volatility in an integrated international capital market

This paper examines the dynamic behavior of the stock return volatility for Canada, Japan, Germany, and the United Kingdom. The evidence indicates that international stock return volatility is mainly influenced by the U.S. stock return volatility and the exchange rate volatility, supporting the international capital market integration hypothesis. There seems to be some correlation between stock return volatility and macroeconomic volatility, but the effect is relatively weaker. In addition to the economic fundamentals, the noise component is found to be time varying, confirming the AR(MA)CH specifications in the stock return models.     

Spillover and Cojumps Between the U.S. and Chinese Stock Markets

There is an urgent need to understand the spillover and cojump effects between the U.S. and Chinese stock markets. The paper finds that since July 2005, the U.S. stock market has caused short-run spillover effects on returns on the Chinese stock market. More specifically, price changes in the United States can be used to predict both closing-to-opening and closing-to-closing returns on the Chinese stock market on the next day. However, there is no significant volatility spillover between the two markets. Both markets have shown stronger cojump behavior since the subprime crisis. The return relationships between the two stock markets are robust.     

Interdependence and Volatility Spillovers Under Market Liberalization: The Case of Istanbul Stock Exchange

This paper analyzes stock returns and volatility relations between the Istanbul Stock Exchange (ISE) and the global market as represented by stock markets in the US, the UK, Japan and Germany. Results from monthly data and multivariate cointegration tests suggest that the ISE became significantly integrated in the global market only in the period following market liberalization in late 1989. We also find evidence based on GARCH estimations that capital liberalization actually mitigated, rather than intensified, volatility in the ISE. Our results further suggest that the Asian crisis in mid‐1997 and the consequent Russian economic meltdown in mid‐1998 are partly responsible for the recent excessive volatility in the Turkish market. The results also identify the US and the UK markets as dominate sources of volatility spillovers for the ISE, even in the period following the Asian‐Russian crises. Consequently, it appears that the two matured markets of the US and the UK shoulder significant responsibility for the stability and financial health of smaller emerging markets like the ISE.     

Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management

In this article we take a recent generalized VAR-GARCH approach to examine the extent of volatility transmission between oil and stock markets in Europe and the United States at the sector-level. The empirical model is advantageous in that it typically allows simultaneous shock transmission in the conditional returns and volatilities. Insofar as volatility transmission across oil and stock sector markets is a crucial element for portfolio designs and risk management, we also analyze the optimal weights and hedge ratios for oil-stock portfolio holdings with respect to the results. Our findings point to the existence of significant volatility spillover between oil and sector stock returns. However, the spillover is usually unidirectional from oil markets to stock markets in Europe, but bidirectional in the United States. Our back-testing procedures, finally, suggest that taking the cross-market volatility spillovers estimated from the VAR-GARCH models often leads to diversification benefits and hedging effectiveness better than those of commonly used multivariate volatility models such as the CCC-GARCH of Bollerslev (1990), the diagonal BEKK-GARCH of Engle and Kroner (1995) and the DCC-GARCH of Engle (2002).     

Testing stock market linkages for Poland and Hungary: A multivariate GARCH approach

This paper examines the linkages between the emerging stock markets in Warsaw and Budapest and the established markets in Frankfurt and the U.S. By using a four-variable asymmetric GARCH-BEKK model, we find evidence of returns and volatility spillovers from the developed to the emerging markets. However, as the estimated time-varying conditional covariances and the variance decompositions indicate limited interactions among the markets, the emerging markets are weakly linked to the developed markets. The implication is that foreign investors may benefit from the reduction of risk by adding the stocks in the emerging markets to their investment portfolio.