On detection of volatility spillovers in overlapping stock markets

This paper applies a recently proposed structural vector autoregressive model identification method to an established, previously unidentified theoretical model of stock market volatility spillovers. The structural model is identified and can be estimated with the method of maximum likelihood. Volatility spillovers can then be tested with the standard likelihood ratio test. This way our test, unlike the majority of the existing volatility spillover tests, has its foundations firmly in the economic theory. Our test is developed for fully overlapping stock markets. The empirical application of the paper considers stock markets of the eurozone in the years 2010–2011. Evidence of volatility spillovers is found.     

Intra- and inter-regional return and volatility spillovers across emerging and developed markets: Evidence from stock indices and stock index futures

We provide empirical evidence on the patterns of intra- and inter-regional transmission of information across 10 developed and 11 emerging markets in Asia, the Americas, Europe and Africa using both stock indices and stock index futures. The main transmission channels are examined in the period from 2005 to 2014 through the analysis of return and volatility spillovers around the most recent crises based on the generalized vector autoregressive framework. Our findings demonstrate that markets are more susceptible to domestic and region-specific volatility shocks than to inter-regional contagion. A novel result reported in our study is a difference in patterns of international signals transmission between models employing indices and futures data. We conclude that futures data provide more efficient channels of information transmission because the magnitude of return and volatility spillovers across futures is larger than across indices. Our findings are relevant to practitioners, such as stock market investors, as well as policy makers and can help enhance their understanding of financial markets interconnectedness.     

Asymmetric volatility spillovers between economic policy uncertainty and stock markets: Evidence from China

This study explores the spillovers between economic policy uncertainty (EPU) and stock market realized volatility (RV). The monthly index of Chinese and US EPU and RV are used to analyze the pairwise directional spillovers. We find that RV is a net receiver that is more vulnerable to shocks from U.S. EPU than to shocks from Chinese EPU. We further decompose the RV into good and bad volatility to test the asymmetric spillover effect between the stock market and EPU. The results suggest that EPU has a bigger effect on bad volatility in the stock market throughout most of the sample period. However, we find that good volatility spillovers become larger during periods of stimulated reform, whereas bad volatility spillovers become larger during periods of international disputes. We show that Chinese stock market volatility is sensitive to both U.S. and Chinese EPU and that the spillover is asymmetric in different periods.     

Correlations in price changes and volatility across international stock markets

The short-run interdependence of prices and price volatilityacross three major international stock market is studied. Dailyopening and closing prices of major stock indexes for the Tokyo,London, and New York stock markets are examined. The analysisutilizes the autoregressive conditionally heteroskedastic (ARCH)family of statistical models to explore these pricing relationship.Evidence of price volatility spillovers from New York to Tokyo,London to Tokyo, and New York to London is observed, but noprice volatility spillover effects in other directions are foundfor the pre-October 1987 period.     

Dynamic volatility spillovers and investment strategies between the Chinese stock market and commodity markets

Building on the increased interest in the volatility spillover effects between Chinese stock market and commodity markets, this paper investigates the dynamic volatility spillovers of Chinese stock market and Chinese commodity markets based on the volatility spillover index under the framework of TVP-VAR. The result shows that there is a highly dependent relationship between the stock market and commodity markets. On average, the Chinese stock market is the net recipient of spillover, non-ferrous metals and chemical industry have a very obvious spillover impact on the stock market. The degree of total volatility spillover is different in different periods. After major crisis events, the volatility correlation between markets increases. Since the outbreak of COVID-19, the spillover effect of the stock market on the commodity market has been significantly enhanced. Then optimal portfolio weights and hedge ratios are calculated for portfolio diversification and risk management. The result shows that the ability of most commodities to hedge against risks is significantly reduced when the crisis occurs; NMFI (precious metals) and CRFI (grain) still have good hedging ability after the crisis, but the effectiveness of hedging risk is relatively low. Besides, the combination of CRFI and SHCI (the Shanghai composite index) is the most effective for risk reduction.     

Illiquidity,return and risk in G7 stock markets: Interdependencies and spillovers

Trading activity in G7 stock markets reflects not only the macroeconomic and financial impact of these G7 economies in international economic growth, but also their financial interdependence. While this nexus of major stock markets has been explored in terms of volatility and return spillovers, there has been no combined analysis of return, volatility and illiquidity spillovers. We study illiquidity spillovers because they are transmissions of trading activity and, thereof, transmissions of information and market sentiment. We find that the dynamics of international stock markets are characterized by persistent illiquidity and also that illiquidity shocks are significantly correlated across markets. Furthermore, we discover Granger causal associations between risk, return and illiquidity across G7 stock market and also within each stock market. Our findings bear significance for the regulation of international financial markets and also for international portfolio diversification.     

Dependences and volatility spillovers between the oil and stock markets: New evidence from the copula and VAR-BEKK-GARCH models

This paper examines the dynamic relationship between the oil market and stock markets from two perspectives: dependence between the crude oil market (WTI) and stock markets of the US and China, and volatility spillovers between them during 1991–2016. We further analyze structural breaks of market dependences and consider the extent of their influence on such relationships. Our vine-copula results show that the dependences between the three paired markets, WTI-US, WTI-China and US-China, vary dynamically across the six identified structural break periods. In particular, the dependence between WTI-US is stronger and more volatile than that between WTI-China during most of the periods. The dependence between US-China remains at a lower level in the earlier periods, but increases in the final period. Our VAR-BEKK-GARCH results demonstrate distinctive volatility spillovers across these periods, with varying directionality, in response to the structural changes. Overall, our results indicate that the oil market stimulates rapid and continual fluctuations in market dependences, which become manifest most acutely in the aftermath of the Financial Crisis of 2007–08, demonstrating the increasing interdependence between the oil and stock markets. Further, the growing influence of China on the dynamics of these relationships, in the period following the Great Recession, presents evidence that it begins to assume an increasingly important role in global economic recovery.     

Dynamic volatility spillovers across oil and natural gas futures markets based on a time-varying spillover method

This paper analyzes dynamic volatility spillovers between four major energy commodities (i.e., crude oil, gasoline, heating oil and natural gas) in the oil-natural gas future markets. We construct a time-varying spillover method by combining the TVP-VAR-SV model and the spillover method of Diebold and Yilmaz (2009, 2012, 2014). We use the spillover method to obtain time-varying total, directional and pairwise volatility spillover indices. Our results summarize as follows: (1) The volatility spillover indices present peaks and troughs during some periods, such as shale gas revolution, financial crisis, and oil price crash; (2) After the U.S. shale gas revolution, the size of volatility spillover from natural gas future market has reduced sharply, but volatility doesn't decouple from the other three oil future markets; (3) The directional spillover is asymmetric. The crude oil and heating oil futures market are main net transmitter of volatility risk information, while the gasoline and natural gas futures markets are the net receiver; (4) For natural gas future market, the pairwise volatility spillover from crude oil future market has the most significant influence.     

Dynamic spillovers across oil,gold and stock markets in the presence of major public health emergencies

Extreme events have a systemic impact on global financial markets, leading to significant cross-market spillovers in the oil, gold, and stock markets and raising widespread concerns about market linkages and risk contagion. In this paper, with a focus on both return and volatility, a frontier spillover network analysis is used to examine the strength and scale characteristics of spillovers in the oil, gold and stock markets under major public health emergency shocks. In addition, the paper adopts a marginal spillover and network analysis to evaluate linkage relationships, risk sources and transmission paths in the oil, gold, and stock markets during such events. The results show that the return and volatility spillover effects generated across the oil, gold, and stock markets are significant, with return spillovers being more stable and volatility spillovers being highly sensitive to emergencies. Meanwhile, the COVID-19 pandemic has displayed the strongest return and volatility spillovers. The high intensity of the shocks during the COVID-19 period has changed the usual characteristics of the market, with the gold market becoming the risk receiver and the oil market becoming risk sources.     

Return,volatility spillovers and dynamic correlation in the BRIC equity markets: An analysis using a bivariate EGARCH framework

This paper examines the level of integration and the dynamic relationship between the BRIC countries, their respective regions and the world. We find that India shows the highest level of regional and global integration among the BRIC countries, followed by Brazil and Russia and lastly by China. There is a negative relationship between the location conditional volatility of India with that of the Asia-Pacific region and of China with the world, which indicates a presence of diversification opportunities for portfolio investors. Portfolio investors can continue to receive sound returns from taking positions in the index of these countries, however for an outstanding investment performance, they should consider investing in specific areas of growth within the economy rather than the country index.     

Time-varying linkages between energy and stock markets: Dynamic spillovers and driving factors

Integration between international energy prices and stock market returns is critical for global economics and politics. In this study, we employ a TVP-VAR (time-varying parameter vector autoregression) connectedness decomposition approach to investigate the time-varying linkages between a diversified energy portfolio comprising oil, coal, natural gas, and stock returns in G7 countries and China. This approach allows us to show the dynamic spillovers and explore the driving factors underlying the dynamic patterns. We find that geopolitical risks, global economic policy uncertainties, and equity market volatility can influence cross-market spillovers. This study expounds the effect of energy financialization.     

The impact of Covid-19 on G7 stock markets volatility: Evidence from a ST-HAR model

We investigate the impact of Covid-19 on stock markets across G7 countries and their business sectors. We highlight the synchronicity and severity of this unprecedented crisis. We find strong transition evidence to a crisis regime in all countries and sectors, yet crisis intensity and timings vary. The Health Care and Consumer services sectors were the most severely affected; a reflection of the Covid-19 drug-race and international travel restrictions. The Technology sector was hit the latest and least severely, as imposed lockdown measures forced people to explore various web-based entertainment and distraction options. Country-wise the UK and the US were the most affected with the highest heterogeneity in their business sectors' response; a possible reflection of the ambiguity in the initial response and adoption of lockdown measures. Financial markets' response to Covid-19 is akin to response in previous financial crisis rather than previous pandemics. A series of robustness checks confirms our findings.     

Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico

This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.     

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

This paper contributes to the current debate on the empirical validity of the decoupling hypothesis of the Islamic stock market from its mainstream counterparts by examining return and volatility spillovers across the global Islamic stock market, three main conventional national stock markets (the US, the UK and Japan) and a number of influential macroeconomic and financial variables over the period from July 1996 to June 2016. To that end, the VAR-based spillover index approach based on the generalized VAR framework developed by Diebold and Yilmaz (2012) is applied. The empirical analysis shows strong interactions in return and volatility among the global Islamic stock market, the conventional stock markets and the set of major risk factors considered. This finding means that the Islamic equity universe does not constitute a viable alternative for investors who wish to hedge their investments against the vagaries of stock markets, but it is exposed to the same global factors and risks hitting the conventional financial system. Therefore, this evidence leads to the rejection of the decoupling hypothesis of the Islamic stock market from conventional stock markets, which has significant implications for faith-based investors and policy makers in terms of portfolio diversification, hedging strategies and contagion risk.     

Returns,volatility and investor sentiment: Evidence from European stock markets

In this study, we show that patterns in returns behave as if investors, influenced by their level of optimism, selected stocks according to their volatility. Our goal is to confirm the contribution of behavioral finance while showing that investor sentiment can be profitably used by practitioners. We incorporate volatility in the relationship between investor sentiment and future returns, this is the main originality of our approach. Our methodology consists in comparing returns, volatility and higher-order moments of portfolios managed with investor sentiment against those obtained either with passive (buy and hold) portfolio management or with a minimum variance portfolio. Portfolios managed with investor sentiment have better returns and involve less risk under certain conditions.     

Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets

This article examines sudden changes in volatility for five Gulf area Arab stock markets using the iterated cumulative sums of squares (ICSS) algorithm and analyzes their impacts on the estimated persistence of volatility. This algorithm identifies large shifts in volatility of the stock markets during the weekly period 1994 to 2001. In contrast to Aggarwal et al. [Aggarwal, R., Inclan, C., & Leal, R., 1999, Volatility in emerging markets. Journal of Financial and Quantitative Analysis 34, 33-55], this paper found that most of the Gulf Arab stock markets are more sensitive to major global events than to local and regional factors. The 1997 Asian crisis, the collapse of oil prices in 1998 after the crisis, the adoption of the price band mechanism by OPEC in 2000, and the September 11th attack have been found to have consistently affected the Gulf markets. Accounting for these large shifts in volatility in the GARCH(1,1) models significantly reduces the estimated persistence of the volatility in the Gulf stock markets.     

On the volatility spillover between lslamic and conventional stock markets: A quantile regression analysis

This paper aims at analyzing the degree and structure of interdependencies in terms of volatility (transmission, contagion) between Islamic and conventional stock markets on calm periods and at times of financial fragility and crisis. We focused on the recent financial instability periods and used the Quantile Regression-based GARCH model. Main results lead to very interesting conclusions. First, it has been found that Islamic stock markets are not totally immune to the global financial crisis. Second, a very strong interdependence is sensed from the conventional to the Islamic stock markets, especially, from the conventional developed markets to the Islamic Emerging and Arab markets and to the Islamic developed markets. Finally, it has been proved that the interdependencies from conventional to Islamic markets are propagated between Islamic markets. Our findings suggest that the Islamic finance industry does not seem able to provide cushion against economic and financial shocks that affect conventional markets.     

Constructing a positive sentiment index for COVID-19: Evidence from G20 stock markets

The present study investigates the degree of market responses through the scope of investors' sentiment during the COVID-19 pandemic across G20 markets by constructing a novel positive search volume index for COVID-19 (COVID19⁺). Our key findings, obtained using a Panel-GARCH model, indicate that an increased COVID19⁺ index suggests that investors decrease their COVID-19 related crisis sentiment by escalating their Google searches for positively associated COVID-19 related keywords. Specifically, we explore the predictive power of the newly constructed index on stock returns and volatility. According to our findings, investor sentiment positively (negatively) predicts the stock return (volatility) during the COVID-19. This is the first study assessing global sentiment by proposing a novel proxy and its impacts on the G20 equity market.     

Risk spillovers from China's and the US stock markets during high-volatility periods: Evidence from East Asianstock markets

This paper studies cross-country risk spillovers through C-vine copula quantile regression. We find Both China's and the US markets can result in large risk spillovers to East Asian markets. Furthermore, their significant conditional spillovers indicate they can emit risk through an intermediary market. However, their distinctive dependency structures with East Asian markets reflect their differences in spillovers to the markets in magnitude. The risk spillovers from US are stronger than China in magnitude. Moreover, the risk spillover from China's stock market during its high-volatility period is weaker than the whole period, which is contrary to the US market. It may imply Chinese financial influences gradually increase with Chinese financial liberalization and regional integration. Our results have implications for macroprudential regulators adopt the effective supervision and regulation to deal with the cross-border risk spillovers, and for international investors in risk hedging, derivative valuation and investment.     

Sudden changes in volatility: The case of five central European stock markets

This paper investigates sudden changes in volatility in the stock markets of new European Union (EU) members by utilizing the iterated cumulative sums of squares (ICSS) algorithm. Using weekly data over the sample period 1994–2006, the time period of sudden change in variance of returns and the length of this variance shift are detected. A sudden change in volatility seems to arise from the evolution of emerging stock markets, exchange rate policy changes and financial crises. Evidence also reveals that when sudden shifts are taken into account in the GARCH models, the persistence of volatility is reduced significantly in every series. It suggests that many previous studies may have overestimated the degree of volatility persistence existing in financial time series.