The transmission of market shocks and bilateral linkages: Evidence from emerging economies

The linkage between emerging and developed economies spans beyond the usual trade in goods and services. Underlying trade is the flow of capital for foreign direct investment and for speculation in markets, which renders emerging economies vulnerable to shocks from the developed world. As such, equity return volatility in emerging markets is partly attributable to this dependence. To gauge the importance of bilateral economic and cultural factors in driving economic integration, we adopt a two-step process. First, we use Diebold and Yilmaz's spillover index methodology to extract spillover indices representative of the return volatility spillover effects of the United States, the developed portion of the Euro area, and Japan on financial markets in Asia, the Gulf Cooperation Council countries, Eastern and Central Europe, Africa, and Latin America. Second, we test whether these indices are governed by economic and cultural factors. Our results show that the spillover effects vary across markets and that a strong correlation exists with the volume of trade, security investment, common language, distance, and market capitalization.     

Asymmetry in spillover effects: Evidence for international stock index futures markets

The paper investigates the asymmetry in return and volatility spillovers across futures markets with non-overlapping stock exchange trading hours. The transmission of positive and negative return and volatility shocks is analysed for 104 channels of information conveyance identified by combining 9 developed and 11 emerging markets in markets pairs with non-overlapping trading hours. The asymmetric causality test is employed to daily stock index futures returns and volatilities for the period from 03 October 2010 to 03 October 2014. The paper sheds light on the relatively little explored concept of asymmetry in return and volatility spillovers across markets, providing novel evidence on stabilizing and destabilizing spillover effects.     

Spatial linkage of volatility spillovers and its explanation across G20 stock markets: A network framework

This paper empirically estimates the spatial correlation relationship of volatility spillovers and its influencing factors across G20 stock market. We apply GARCH-BEKK model to estimate volatility spillover and construct dynamic volatility networks. The connectedness analysis shows that the spatial linkage of volatility spillover is time varying and has obvious multiple superposition phenomena. As somewhat innovation results, we use the factor analysis method to obtain centrality comprehensive indicators that can clearly depict the risk contagion intensity and risk acceptance intensity. In general, the developed markets are more influential than the emerging markets during periods of turbulence, and the emerging markets are more sensitive to volatility shocks than developed markets during any period. Finally, this paper introduces quadratic assignment procedure (QAP) method to identify the major factors that influence the spatial linkage of volatility spillovers. Results show that geography influences the volatility spatial correlation differently across economic cycles, and the centrality structure factors have greater impact on the spatial correlation than the external economic factors. The QAP regression analysis shows that these influencing factors can explain about 50% of the spatial correlation variation of international financial markets' volatility spillovers.     

Volatility spillovers and dynamic correlation in European bond markets

This paper examines the dynamic linkages among the European bond markets. We model the price and volatility spillovers from the US bond market and the aggregate Euro area bond market to twelve individual European bond markets using an EGARCH model that allows for a dynamic correlation structure. Our results suggest that significant volatility spillovers exist from both the aggregate Euro area bond market and the US bond market to the individual European markets. Moreover, the introduction of the Euro has strengthened the volatility spillover effects and the cross-correlations for most European bond markets.     

Returns and volatility spillover in the European banking industry during global financial crisis: Flight to perceived quality or contagion?

This paper empirically investigates return, volatility and leverage spillover effects between banking industrial stock markets of the major economies (ME) (Germany, UK and US) and the smaller stressed European Union countries (SE), (Italy, Ireland, Greece, Spain and Portugal) from 2002 to 2014 which includes the global financial crisis period (2007–2014). Thus the paper investigates the influence of the global crisis on the spillover between the banking industrial stock markets of Europe and the US. We apply a multivariate GARCH–GJR framework to investigate the effects of the financial crisis with respect to spillover. Our results indicate an increase in both means and volatility spillover between the major economies and the stressed EU economies from the pre-crisis to the crisis period. During the pre-crisis period there is ample evidence of spillover from Germany, UK and the US to the smaller EU economies. Little evidence of a significant spillover from the smaller economies to the major economies is found during this period. We find that return and volatility transmission mechanisms between the major economies and the smaller EU countries are asymmetric during the crisis period. During the crisis, the level and amount of spillover from the major economies increase. But now there is also clear evidence of spillover from smaller EU economies to the major economies, this is especially true for Germany and the UK. Evidence of spillover effects suggests the existence of exploitable trading strategies and has important implications to investors in the areas of option pricing, portfolio optimization and risk management.     

Inter- and intra-regional stock market relations for the GCC bloc

This paper examines the patterns of information transmission for equity markets in the seven Gulf Cooperation Council countries over the period from 2004 to 2019. Using weekly data, correlations and spillovers both within the region and from the US, the EU and Japan are modelled through the Dynamic Conditional Correlation-GARCH model and the Diebold-Yilmaz spillover index. While GCC markets exhibit increasing correlations with, primarily, the EU and, to a lesser extent, the US, they nonetheless remain relatively less interlinked globally. Our findings support significant return and volatility spillovers from the EU and the US to the GCC markets, with stronger spillovers from the EU. Intra-regionally, the UAE is the main transmitter and receiver of spillovers between the GCC and world markets. Furthermore, we see evidence of a decoupling pattern within the GCC countries, with notable segmentation in the markets of Bahrain and Kuwait.     

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.     

The behaviour of asset return and volatility spillovers in Turkey: A tale of two crises

This paper examines return and volatility spillovers between the Turkish stock market with international stock, exchange rate and commodity markets. Our aim is not only to examine spillover behaviour with a large emerging market but also to examine cross—asset spillovers and how they vary across two periods of financial market crisis; the dotcom crash and the liquidity-induced financial crisis. This is to be compared with existing work that typically focuses on industrialised countries or single asset markets only. Using the spillover index methodology we uncover an interesting distinction between these two periods of markets stress. Over the dotcom period spillovers are largely between the same asset class, notably two exchange rate series and two international stock markets series. However, in the period including the financial crisis, spillovers both increase and cross asset types and suggest a much greater degree of market interdependence. Understanding this changing nature in spillovers is key for investors, regulators and academics involved in theoretical model development.     

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.     

Explaining Monetary Spillovers: The Matrix Reloaded

This paper relies on a high-frequency identification approach to provide new insights into monetary policy spillovers by major central banks. Our long and broad sample (1999–2019, from four major economies to 47 advanced and emerging market economies) allows us to accurately identify the properties of spillovers and to shed light on different transmission channels. We find that spillovers by the Fed to foreign interest rates are economically large, but more surprisingly, document an intensification of spillovers by the European Central Bank over time. Spillovers are more significant to bond yields in advanced economies than they are to those in emerging markets. Differentiating across key spillover channels, we find strongest support for a financial links channel, but weaker evidence for the macroeconomic links channel and foreign exchange regime channel.     

Idiosyncratic return volatility and the role of firm fundamentals: A cross-country analysis

We investigate the relation between fundamental idiosyncratic volatility and stock returns idiosyncratic volatility using data from 56 countries. We find a strong positive relation between fundamental idiosyncratic volatility and idiosyncratic volatility of returns. This association, however, seems to be entirely concentrated in the developed economies, and we find no effect in the emerging markets. Specifically, fundamental idiosyncratic volatility does not lead to more idiosyncratic return volatility in countries with poor legal institutions and weak shareholder protection laws.     

Return and volatility spillovers between currency and bond markets in India

This paper examines the return and volatility spillovers between the foreign exchange and bond markets of India using a bivariate asymmetric BEKK-GARCH (1,1) model for the period 4 April 2005 to 31 March 2017. We find the evidence of bidirectional return and volatility spillovers with asymmetric effects between these two markets. The spillovers are evidenced even during the periods when foreign portfolio investments in the Indian bond markets were relatively low suggests the existence of strong inter-linkages between both the markets.     

Hedging with Chinese Aluminum Futures: International Evidence with Return and Volatility Spillover Indices Under Structural Breaks

This paper examines the hedging performance of the Shanghai futures market, with the London futures market acting as the channel for volatility spillover. Taking into consideration structural change, basis effects, and return and volatility spillover effects, the authors find that the estimated hedging performance is not improved. Their findings suggest that the effectiveness of the hedging performance of aluminum futures contracts in China is not affected by the magnitude or direction of return and volatility spillovers. Therefore, even when the magnitude and direction of volatility spillover from other markets can be correctly predicted, the hedging performance of a futures contract cannot be significantly improved. This paper uses precise measures of return spillovers and volatility spillovers based directly on the framework of vector autoregressive variance decompositions. The study also includes an analysis of both crisis and noncrisis episodes, with modeling on bursts in spillovers.     

Spillovers among sovereign CDS,stock and commodity markets: A correlation network perspective

In the wake of the globalization of financial markets, studying spillovers among different asset markets, especially spillovers that include sovereign CDS markets, is of vital importance. This paper attempts to build a spillover network to investigate the complex interactions within the system of sovereign CDS, stock and commodity markets by adopting the spillover index based on forecast error variance (FEV) decomposition. The results reveal that emerging countries have larger average spillovers than developed countries with regard to sovereign CDS-to-stock returns spillovers, while the developed countries contribute more average spillovers than the emerging countries in the opposite direction. Moreover, the sovereign CDS market and the commodity market still demonstrate a relatively important role during certain periods although stock markets always occupy the dominant position during every phase. Our findings provide new insights into spillovers among the major global asset markets using a network perspective, which is valuable for regulation of financial markets, asset allocation and portfolio risk management.     

Volatility‐Spillover Effects in European Bond Markets

Volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility‐spillover model is analysed. Strong statistical evidence of volatility spillover from the US and aggregate European bond markets is found. For EMU countries, the US volatility‐spillover effects are rather weak (in economic terms) whereas the European volatility‐spillover effects are strong. The bond markets of EMU countries have become much more integrated after the introduction of the euro, and in recent years they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates.     

Do bears and bulls swim across oceans? Market information transmission between greater China and the rest of the world

This study investigates returns and volatilities transmission across Greater China’s four emerging stock markets and three developed international markets, Tokyo, London, and New York. Using daily open and close price data from 1994 to 2001, we provide empirical evidence that the overnight returns on all the Greater China stock indices can be estimated by using information from at least one of the three developed markets’ daytime returns. The contemporaneous return spillovers are in general unidirectional from more advanced major international markets to the Chinese markets. However, split-sample analysis suggests that there is also evidence of bi-directional return spillovers after the 1997 Asian financial crisis. We also find that there are no one-period lagged return spillover effects from the three advanced markets to the Chinese markets, except for Taiwan. Finally, Mainland China’s two stock markets are not affected by contemporaneous nor delayed “bad news”.     

Cross‐Country Spillovers from Fiscal Consolidations

In the aftermath of the global financial crisis, many OECD countries adopted fiscal consolidation strategies to reduce their debt‐to‐GDP ratios. This paper investigates the effects of fiscal consolidation on trading partners’ growth through trade linkages. Using a measure of exogenous fiscal shocks in export markets, fiscal consolidation spillovers are found to slow down domestic growth and decrease employment. To the extent that fiscal consolidations are synchronised, fiscal policies have large spillover effects on output. Spillovers of fiscal consolidations on growth are found to be initially larger between countries belonging to currency unions, though this larger impact vanishes over the medium term. Larger spillovers of fiscal consolidation coincide with lower bilateral exports, higher bilateral imports and relative increases in unit labour costs in currency unions. Spillovers of fiscal consolidation are also found to be more detrimental to domestic growth during economic downturns in export markets.     

Exchange return co-movements and volatility spillovers before and after the introduction of euro

This paper examines return co-movements and volatility spillovers between major exchange rates before and after the introduction of euro. Dynamic correlations and VAR-based spillover index results suggest significant return co-movements and volatility spillovers, however, their extend is, on average, lower in the post-euro period. Co-movements and spillovers are positively associated with extreme episodes and US dollar appreciations. The euro (Deutsche mark) is the dominant net transmitter of volatility, while the British pound the dominant net receiver of volatility in both periods. Nevertheless, cross-market volatility spillovers are bidirectional, and the highest spillovers occur between European markets.     

Extreme quantile spillovers and drivers among clean energy,electricity and energy metals markets

This paper examines return and volatility spillover effects among the clean energy (electric vehicles, solar and wind), electricity and 8 energy metals (silver, tin, nickel, cobalt, lead, zinc, aluminum and copper) markets and their drivers under the conditions of the mean and extreme quantiles. The results show moderate spillovers among the clean energy, electricity and energy metals markets, and greater connectivity among the three markets under extreme quantile conditions. Among them, the clean energy markets always play the role of the transmitter, and the electricity market always plays the role of the receiver of spillover effects. In addition, the return and volatility spillovers among the three markets have remarkable time-varying features, and they increase dramatically when extreme events occur, especially under extreme quantile conditions. Finally, we reveal the drivers of return and volatility spillovers among these markets by the OLS and quantile regression methods. The COVID-19 and the Arca Tech 100 (PSE) index are found to be important drivers.     

金融市场流动性波动溢出效应的实证分析

金融资产流动性是影响其收益率的重要因素.本文在设计债券市场连续的综合流动性指标和股票市场波动调整的流动性指标的基础上,利用允许均值系统方程间互相关的AVAR-TVGARcH模型,并结合wald检验和LR检验对于股票、债券和人民币汇率市场间的流动性波动溢出效应进行检验.研究发现:三个市场间存在较为显著的流动性波动溢出效应.回归系数显示市场流动性间的波动溢出效应较小.同时,本文发现外汇和股票市场流动性序列间的条件协方差都存在明显的时变特征和程度不一的聚类现象.