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.     

Trading gap in holidays and price transmission: Evidence from cross-listed stocks on the A-share and H-share markets

Chinese public holidays of differing durations celebrated in mainland China and Hong Kong provide a unique trading gap when the A-share markets are closed but the H-share market is not. In this study, we examine how these non-overlapping trading gaps caused by holidays affect price transmission between cross-listed stocks in the A-share and H-share markets. We find that the price movements of H-shares during trading gaps are positively associated with post-holiday drifts in the A-share markets. This positive association is stronger when the length of non-overlapping holidays is longer, and when firms have a weaker connection to Hong Kong market. Moreover, our evidence reveals that investor distraction rather than sentiment during holiday periods may be the reason for this positive association. Finally, our results show that a portfolio trading strategy based on our findings can be profitable, indicating the economic magnitude of our findings.     

Transmission of volatility between stock markets

This article investigates why, in October 1987, almost all stockmarkets fell together despite widely differing economic circumstances.We construct a model in which 'contagion' between markets occursas a result of attempts by rational agents to infer informationfrom price changes in other markets. This provides a channelthrough which a 'mistake' in one market can be transmitted toother markets. We offer supporting evidence for contagion effectsusing two different sources of data.     

Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets

An understanding of volatility and co-movements in financial markets is important for portfolio allocation and risk management practices. The current financial crisis caused a shrinkage in values of most assets, an increased volatility and a threat to the survival of several institutional investors. Managing risks and returns within the classic portfolio theory, when correlations across securities soar, is increasingly challenging. In this paper, we investigate the volatility behavior and the co-movements between sukuk and international stock indexes. Symmetric multivariate GARCH models with dynamic conditional correlations (DCC) were estimated under Student-t distribution. We provide evidence of high correlations between sukuk and US and EU stock markets, without finding the well-known flight to quality behavior affecting Islamic bonds. We also show that volatility linkages between sukuk and regional market indexes are higher during financial crisis. We argue that investors could obtain diversification benefits including sukuk in a well-diversified equity portfolio, given their lower volatility compared to equity. But higher volatility linkages and dynamic correlations during financial crises show that they are hybrid instruments between bonds and equity. Our findings are relevant for institutional investors and asset managers that include Islamic bonds in a diversified portfolio.     

Modelling return and conditional volatility exposures in global stock markets

This article empirically investigates the exposure of country-level conditional stock return volatilities to conditional global stock return volatility. It provides evidence that conditional stock market return volatilities have a contemporaneous association with global return volatilities. While all the countries included in the study exhibited a significant and positive relationship to global volatility, emerging market volatility exposures were considerably higher than developed market exposures. JEL Classification G12     

Determining the contributions to price discovery for Chinese cross-listed stocks

We study the price-discovery process for a number of Chinese cross-listed stocks. For the stocks cross-listed on the New York Stock Exchange (NYSE) and the Stock Exchange of Hong Kong (SEHK), we find that the stock prices of these two exchanges are cointegrated and mutually adjusting, and that the SEHK makes more contributions than the NYSE to the price-discovery process. The SEHK contributions are 81.6% and 89.4%, computed from Gonzalo and Granger [Gonzalo, J., Granger, C., 1995. Estimation of common long-memory components in cointegrated systems. Journal of Business and Economics Statistics 13, 27–35] permanent–transitory (PT) and Hasbrouck [Hasbrouck, J., 1995. One security, many markets: Determining the contributions to price discovery. Journal of Finance 50, 1175–1119] information share (IS) models respectively.     

The volatility linkage between energy and agricultural futures markets with external shocks

This paper investigates the volatility linkage between energy and agricultural futures returns and how this linkage responds to external macroeconomic shocks. A framework combining the VARMA-BEKK-GARCH model and the Permanent-Transitory decomposition technology is employed to detect the volatility transmission, to decompose the volatility linkage into permanent and transitory components, and to examine the underlying determinants of the transitory volatility linkage. We have the following findings. A bidirectional volatility linkage between energy and agricultural futures returns exists and becomes more pronounced in recent years. The bidirectional linkage results from the co-movement effect induced by external shocks rather than from the substitution effect induced by the biofuel industry, and is not weakened by the shale gas revolution. Serving as proxies for external shocks from the world economy, trade, and financial markets, the CRB, BDI, and USDX indices provide strong explanatory power for the transitory volatility linkage, and the futures of these indices can be used to effectively and inexpensively hedge against the risks of the portfolios involving energy and agricultural futures.     

Exchange rate expectations and the pricing of Chinese cross-listed stocks

I show that the price discounts of Chinese cross-listed stocks (American Depositary Receipts (ADRs) and H-shares) to their underlying A-shares indicate the expected yuan/US dollar exchange rate. The forecasting models reveal that ADR and H-share discounts predict exchange rate changes more accurately than the random walk and forward exchange rates, particularly at long forecast horizons. Using panel estimations, I find that ADR and H-share investors form their exchange rate expectations according to standard exchange rate theories such as the Harrod-Balassa-Samuelson effect, the risk of competitive devaluations, relative purchasing power parity, uncovered interest rate parity, and the risk of currency crisis.     

On the persistence and volatility in European,American and Asian stocks bull and bear markets

In this paper we examine the statistical properties of several stock market indices in Europe, the US and Asia by means of determining the degree of dependence in both the level and the volatility of the processes. In the latter case, we use the squared returns as a proxy for the volatility. We also investigate the cyclical pattern observed in the data and in particular, if the degree of dependence changes depending on whether there is a bull or a bear period. We use fractional integration and GARCH specifications. The results indicate that the indices are all nonstationary I(1) processes with the squared returns displaying a degree of long memory behaviour. With respect to the bull and bear periods, we do not observe a systematic pattern in terms of the degree of persistence though for some of the indices (FTSE, Dax, Hang Seng and STI) there is a higher degree of dependence in both the level and the volatility during the bull periods.     

Asymmetry in return and volatility spillover between equity and bond markets in Australia

We document asymmetry in return and volatility spillover between equity and bond markets in Australia for daily returns during the period 1992–2006 using a bivariate GARCH modelling approach. Negative bond market returns spillover into lower stock market returns whereas good news originating in the equity market leads to lower bond returns. Bond market volatility spills over into the equity market but the reverse is not true. Transmission of bond volatility into equity volatility depends in a complex way upon the respective signs of the return shocks in each market.     

Oil shocks and volatility jumps

Review of Quantitative Finance and Accounting - In this paper, we analyse the role of oil price shocks, derived from expectations of consumers, economists, financial market, and policymakers, in...     

VPIN,liquidity, and return volatility in the U.S. equity markets

We examine the volume-synchronized probability of informed trading metric (the VPIN flow toxicity metric, developed by Easley, Lopez de Prado, & O'Hara, 2012) as a real-time risk management tool for liquidity deteriorations in the U.S. equity markets. We find that VPIN provides information about market liquidity and stock return volatility on ex-ante basis. These results indicate that VPIN can be a useful risk-management tool for market makers, regulators and traders in the U.S. equity markets. We also document that VPIN is negatively associated with volume and number of trades, but positively associated with trade size and volume fragmentation. These findings suggest that VPIN indicates the adverse selection problem of liquidity providers by capturing the information in volume.     

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.     

Intraday dynamics of volatility and duration: Evidence from Chinese stocks

We propose a new joint model of intraday returns and durations to study the dynamics of several Chinese stocks. We include three U.S. stocks for comparison. Flexible innovation distributions are used for durations and returns, and the total variance of returns is decomposed into different volatility components associated with different transaction horizons. The new model provides strong improvements in density forecasts for duration and returns and only modest gains for points forecasts of the variance of returns. The conditional hazard functions are non-monotonic and there is strong evidence for different volatility components. Although diurnal patterns, volatility components, and market microstructure implications are similar across the markets, there are interesting differences. Durations for lightly traded Chinese stocks tend to carry more information than heavily traded stocks. Chinese investors usually have longer investment horizons, which may be explained by the specific trading rules in China.     

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.     

Insider trading and firm-specific return volatility

Roll (J Financ 43:541–566, 1988) argues that firm-specific stock return volatility may result either from informed trading or from noise trading that is unrelated to information. In this paper we provide evidence that insider purchases are inversely related to the idiosyncratic volatility of stocks. We also find that stock idiosyncratic volatilities are generally inversely related to future 6- and 12-month returns. Our results are primarily driven by the timing of insider sales rather than insider purchases. The results are consistent with an information-based explanation of firm-specific return volatility.     

Credible reforms and stock return volatility: Evidence from privatization

In this paper we investigate how privatization affects stock return volatility. A credible privatization builds investors’ confidence through a reduction in political risk. In particular, a privatization program that is maintained over time signals credibility, which reduces political risk and in turn volatility. We further show that privatization is associated with lower idiosyncratic volatility mainly among developed markets, while it is associated with lower systematic volatility in developing markets. Additional tests suggest that the reduction in volatility is greater when privatization sales are carried out through the stock market than through asset sales.     

Exchange rate volatility and the time-varying effects of aggregate shocks

This paper investigates the dynamics of the real exchange rate and relative output among the US and five of its top six trading partners since the collapse of Bretton Woods. It employs long-run restrictions to identify the usual suspect macroeconomic shocks and their relative importance for exchange rate fluctuations. An improvement of the econometric application is that it allows for the contribution of each shock to the real exchange rate and relative output to vary over time. While the volatility of US output – both total and relative to that of the UK or Canada – is estimated to have substantially reduced since the mid-1980s, consistent with the Great Moderation findings of many others, the volatility of real exchange rates has experienced a gradual and continuous increase over the same period. Monetary shocks account for only a small fraction of these dynamics, although they do track well the increase in volatility of US output during the Great Inflation period. It is supply-type shocks that seem to be more important for the relative output volatility reductions of the mid-1980s. Conversely, demand shocks seem to account for the largest portion of the volatility increases in the real exchange rate. Perhaps unsurprisingly, both volatilities increase during the 2007 financial crisis and the ensuing 2008–2009 Great Recession – periods associated with higher economic uncertainty.     

Stock returns’ sensitivities to crisis shocks: Evidence from developed and emerging markets

We consider three “crisis shocks” related to key features of the 2007–2008 crisis, for emerging and developed economies: (1) the collapse of global trade, (2) the contraction of credit supply, and (3) selling pressure on firms’ equity. Using an international cross-section of firms, we find that returns’ sensitivities to these shocks imply large and statistically significant influences on residual equity returns during the crisis period (after controlling for normal risk factors that are associated with expected returns). Similar analysis for several placebo periods shows that these effects are generally less severe or absent in non-crisis periods. Relative to developed economies, emerging markets are more responsive to global trade conditions (in crisis and in placebo periods), but less responsive to selling pressures. An analysis of portfolios of firms during various placebo periods indicates that investors are not compensated for the risks associated with the crisis shocks. Finally, a month-by-month analysis of returns during the crisis period shows that the time variation of the importance of each of the sensitivities to shocks tracks related changes in the global economic environment.     

An investigation of return and volatility linkages among equity markets: A study of selected European and emerging countries

This paper investigates the linkages among equity returns (based on exchange traded funds, ETF) and transmission of volatilities in the following countries: Germany, Austria, Poland, Russia and Turkey. Multivariate Autoregressive Moving Averages (MARMA) and the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) methodologies are utilized. The findings include the existence of significant co-movement of returns among countries in the sample. Also, Turkish and Russian markets were found to be more volatile than Austria, Germany and Poland. However, volatilities in Russia and Turkey do not persist very long. Finally, there is strong evidence of volatility spillovers. All of the countries in the sample, with the exception of Turkey, experience volatility spillovers from other markets. The presence of spillovers among return series and persistence of volatilities are useful to investors interested in diversifying their portfolios and to traders/fund managers who are interested in maximizing returns.