Spillover Effects among European,the US and Moroccan Stock Markets before and after the Global Financial Crisis

ABSTRACT

This paper assesses return and volatility spillovers among stock markets in Morocco, the US, UK, France and Germany represented respectively by MASI, S&P 500, FTSE 100, CAC 40 and DAX 30 indices, both before and after the global financial crisis (GFC) of 2008. The daily frequency data cover the period from January 2nd, 2002 to June 30th, 2016. Using the Diebold and Yilmaz approach, the results show varying financial connectedness between the Moroccan and the above mentioned developed stock markets. In fact, the significant increase of spillover index during the post-financial crisis period demonstrates that the US and European stock markets were the most affected. On the other hand, despite a relative increase of spillover effects coming from the US and German equity markets, our results show decline in the total net spillovers experienced by the Moroccan market after the recent financial crisis. These findings may provide some useful information to support decision-making and trading strategies for international investors.     

Exchange market pressure,commodity prices,and contagion in Latin America

Over the past two decades, Latin American currencies have faced not only pressure to devalue but also periods of uncomfortable appreciation. Domestic macroeconomic factors, as well as global events and contagion, might bear part of the responsibility. This study constructs a monthly index of exchange market pressure (EMP) for four Latin American countries before using vector autoregressive methods to test the influence of commodity prices, macroeconomic variables, and external factors on each country's index. While inflation is an important determinant of EMP, we conclude that Chile and Peru are more likely than Mexico and Brazil to face pressure when commodity prices fall. This supports the idea that these two countries have “commodity currencies” and that their exchange markets are most vulnerable to international contagion.     

BRIC and the U.S. financial crisis: An empirical investigation of stock and bond markets

We examine empirical evidence of the behavior of stocks and bonds from BRIC nations by using daily data from January 2003 to July 2010. We present unconditional and conditional empirical results depending upon a simple measure of U.S. financial stress. In the long term, BRIC bond markets deviate much more from the U.S. financial stress measure than the BRIC bonds and stocks that deviate among themselves. Stock and bond return correlations for Brazil and Russia are significantly large and negative. The own correlations are more important in determining the evolution of the conditional correlations relative to unexpected news. Dynamic conditional correlations between stock returns, bond returns and U.S. financial stress increase after the Lehman Brothers' event in September 2008, except for the bond returns in India.     

Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy

A short‐run model incorporates instantaneous portfolio equilibrium with macroeconomic flows to clarify the structure of real–financial sector interactions. If equity and foreign exchange markets are introduced in structuralist theories of asset markets in developing countries, the key result that a fall in money supply raises the rate of inflation now holds only under special conditions on partial derivatives. But there is a tendency for interest rates to rise and for fluctuations in asset prices. Fuller integration of asset markets moderates these fluctuations. Outcomes are stable in spite of the generalized complementarity distinguishing equity markets from loan markets. Expectations play a major role. Implications for policy are to link domestic interest rates to foreign, remove artificial barriers to market integration, and stimulate demand as well as supply.     

Diversification potential of Asian frontier,BRIC emerging and major developed stock markets: A wavelet-based value at risk approach

This study examines the portfolio risk and the co-movements between each of the BRIC emerging and South Asian frontier stock markets and each of the major developed stock markets (U.S., UK and Japan), using the wavelet squared coherence approach as well as the wavelet-based Value at Risk (VaR) method. The results show that the co-movements and diversification benefits between these markets vary over time and across frequencies. Additionally, the co-movements are intensified in the wake of the recent global financial crisis (GFC) and the Eurozone sovereign debt crisis (ESDC). More precisely, the wavelet-based VaR ratio indicates that including a BRIC or a South Asian (particularly Pakistan and Sri Lanka at both the short- and long-term) stock market in a portfolio of the developed stock markets reduces the resulting portfolio's VaR. Specifically, adding China in the medium term to this portfolio reduces risk in the pre- and during both the GFC and ESDC periods. By assigning optimal weights to the different market assets in the portfolio formulation, the analysis thus has implications for international investors.     

Oil and stock markets before and after financial crises: A local Gaussian correlation approach

The effect of financial shocks on the cross‐market linkages between oil prices (spot and futures) and stock markets is examined for four major crises. We employ the local Gaussian correlation approach and find that the two markets were regionalized for most of the 1990s and the early 2000s. Flights from stocks to oil occur in all crisis episodes, except the recent global financial crisis. The view that stock and oil markets behave like “a market of one” after the financialization of commodities is further supported by the presence of contagion between US stock markets and all the benchmark oil markets.     

Financial crises and contagion vulnerability of MENA stock markets

This paper examines contagion vulnerability and the international and regional financial linkages of the MENA stock markets. The degree of vulnerability of those markets to global and regional financial crises will have important bearings on the respective economies' growth rate, and on their ability to diversify international and regional portfolios. Granger causality tests and impulse response functions reveal that while the GCC equity markets still offer international investors portfolio diversification potentials, those markets are relatively less vulnerable to global and regional financial crises. Moreover, even though the remaining MENA stock markets of Egypt, Morocco, and Tunisia have matured and are now financially integrated with the world stock markets, they tend to exhibit more vulnerability to regional and international financial crises. Their vulnerability to international financial crises is due, on the one hand, to weak regional integration, and to greater economic and financial integration with the more advanced economies on the other.     

The nature and determinants of comovement between developed,emerging and frontier equity markets: Europe versus Asia‐Pacific

International investors are increasingly attracted towards emerging and frontier markets because of their potential to enhance diversification benefits of a global portfolio. This calls for a rigorous analysis of the nature and determinants of stock market comovement between developed, emerging, and frontier markets in Europe and Asia‐Pacific regions. The findings suggest that unlike their Asia‐Pacific counterparts, European developed, emerging, and frontier stock markets display a higher degree of comovement. Although Asia‐Pacific frontier markets provide good diversification opportunities, investors must be cautioned against their weak financial system. The volatility of returns, gross domestic product growth rate, and the 2008 global financial crisis (GFC) are the key determinants of stock market comovement in Europe. The mechanisms by which comovement in the Asia‐Pacific region is strengthened differ across markets. Comparative analysis of comovement and its determinants across different classes of equity markets and geographies is expected to provide valuable perspectives to global investors, portfolio managers, and policymakers.     

China's slowdown and global financial market volatility: Is world growth losing out?

China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.     

Islamic,socially responsible,and conventional market comovements: Evidence from stock indices

This article extends the literature on ethical investment risks, correlations, and comovements. Through a sample of 17 Islamic, socially responsible investment (SRI), and conventional stock indices, we investigate cointegration and dynamic correlations for the period 2005–2015. We also examine these stock indices’ responses to two major economic factors, namely, oil prices and market volatility. Our results show cointegration between Islamic, SRI and conventional stock indices, and comovements with mutual causalities. During crises, dynamic correlations tend to spike; however, quite a different pattern emerges during postcrisis periods when there is more variability in conditional covariances. Finally, we provide evidence that all three types of stock indices react positively to oil price changes, but negatively to global equity market volatility, albeit with different magnitudes. Overall, investors can obtain portfolio diversification benefits through SRI and Islamic stock indices, particularly in postcrisis periods.     

Supply Chains,Global Financial Shocks and Firm Behaviour towards Liquidity Needs

Driven by the increasingly important role of supply chains in global production, this paper studies empirical association between global credit‐market shocks and firm behaviour towards liquidity needs across countries and industries. Focusing on the adjustment of working‐capital financing, we find two pieces of supporting evidence from international firm‐level panel data covering the period 2002:I–2012:IV. First, for industries where specific investment in the input supplier–customer relationship is large, firms are more exposed to credit‐market shocks. We find that measures of global credit‐market shocks are negatively associated with trade receivables, trade payables and inventories, conditional on the level of contract intensity in the industries where firms operate. Second, firms in emerging markets are more vulnerable to credit‐market shocks than are firms in developed countries. We are also able to verify the economic significance of sales growth, operating cash flows, cash stock and firm size in the overall adjustment. Our findings highlight the importance of balance‐sheet contagion along supply chains during the 2007–09 global financial crisis.     

金融危机背景下汇市与股市关系实证研究

本文建立了由上证综指、汇率、利率与道·琼斯指数构成的多变量VAR模型,运用Granger因果检验、脉冲响应函数与方差分解技术分析了金融危机背景下外汇市场与股票市场关系.实证分析结果表明:我国金融市场上汇率变动对股票价格有明显的短期作用,而股票价格变动对汇率没有影响;美国股市波动对我国股市的短期冲击超过人民币汇率对股市的冲击;我国的利率调整对汇率有短期效应,但对股票价格无影响.     

Decoupling and Contagion: The Special Case of the Eurozone Sovereign Debt Crisis

This paper demonstrates that the Eurozone sovereign debt crisis constitutes a special case in the contagion literature with general implications. Perfectly correlated bond markets imply that contagion can only occur if there is a decoupling to lower correlation levels with increased idiosyncratic shocks leading to more severe but less systemic spillovers. This theoretical prediction is fully supported by the empirical analysis. We also show that dynamic coexceedance estimates provide a more robust and more general picture of contagion than correlation‐based tests. Coexceedances identify only one major incidence of contagion that affected five periphery Eurozone countries in May 2010 and coincided with flight to quality from the periphery to the core and the 2010 “flash crash” in US equity markets.     

International financial integration: Stock return linkages and volatility transmission between Vietnam and advanced countries

This paper investigates the interdependence between the Vietnamese stock market and other influential equity markets in terms of return linkage and volatility transmission covering the period including pre, during and post the 2008 Global Financial Crisis. A VAR model is utilized to estimate the conditional return linkage among these indices and a GARCH-BEKK model is employed to investigate the volatility transmission. We find evidence of statistically significant correlation, return spillover and volatility linkage between Vietnamese stock market with other leading equity markets of the US, Hong Kong and Japan. Moreover, we find that during the financial crisis, stock markets become more interrelated.     

Matching the BRIC equity premium: A structural approach

The equity risk premium (ERP) in BRIC markets is, on average, significantly higher than that in the US market. This paper employs an endowment economy with recursive preferences and long-run risk to explain the ERP generated by a portfolio of BRIC equity indices. The combination of recursive preferences and long-run risk partially explains the BRIC ERP. It turns out that there is a puzzle with respect to BRIC data as well. This holds even if we account for high levels of aversion to consumption and utility risk and for the empirically observed autoregressive structure of US consumption and BRIC dividend growth.     

The Role of Geography in Financial and Economic Integration: A Comparative Analysis of Foreign Direct Investment,Trade and Portfolio Investment Flows

The objective of this paper is to examine the role of geography in explaining the patterns of financial and economic integration among both developed and developing countries. Using a gravity model, we compare North‐North, North‐South and South‐North FDI, trade and portfolio investment flows to examine how geographical factors influence these bilateral flows. The results indicate that the impact of geography variables on FDI and portfolio are similar to their effect on trade. Geography variables have a statistically significant effect both on FDI and portfolio investment, but FDI is more sensitive to distance. We interpret the negative effect of distance as the existence of information costs in financial flows. Also bilateral FDI, trade and portfolio investment flows react to macroeconomic fundamentals in the same way, however, with different degrees of sensitivity. There are significant differences between North‐North and North‐South flows. Our results find support for the argument that most FDI among industrial countries are horizontal, whereas most FDI investment in developing countries is vertical. The fact that the significance of geographical variables on financial flows still remained even after controlling for the macroeconomic fundamentals, is in contrast with the standard capital market model. The results can, however, be reconciled if geographical factors can proxy for information costs, which may in turn explain why country portfolios are still home‐biased. The significant effect of distance on financial flows may also explain how idiosyn cratic shocks are spread (i.e. contagion) to other countries in the same region. Ultimately, the geographical location of a country may determine its economic and financial integration into the world economy.     

基于Copula理论的金融资产传染效应研究

某一突发性金融事件可能使整个金融市场间的联动程度显著增强,并对一定区域乃至世界范围的经济体系产生传染效应。对此,采用Copula函数方法,通过t-GARCH(1,1)模型对资产收益时序进行过滤,运用非参数估计,分析多变量之间相关结构及尾部相关性的变化进而考察变量间的传染效应。通过对美国次贷危机前后多国证券市场的实证分析,结果表明次贷危机后,美国标准普尔指数与代表性的亚洲证券市场间的联动性显著加强,次贷危机对亚洲股市存在传染效应。     

The COVID-19 pandemic and financial markets in Central Europe: Macroeconomic measures and international policy spillovers

This paper investigates the effects of macroeconomic policy announcements on financial markets in three Central European economies: Czechia, Hungary, and Poland (CE–3). We focus on the unprecedented stabilisation policies implemented from March to December 2020 during the COVID-19 pandemic, including unconventional monetary measures and large stimulus programs. Detailed categories of monetary and fiscal measures are introduced into vector autoregressions with exogenous regressors and dynamic conditional correlations, which we estimate using daily data. This allows us to control for policy spillovers from abroad, as well as global risk factors and pandemic-related variables. We find that, in general, macroeconomic policy measures implemented in the CE–3 countries played an important role in stabilising financial markets during the pandemic. We uncover several notable patterns in the reaction of markets to anti-crisis measures across the region. The impact of the monetary policy announcements on 10-year sovereign bond yields was more substantial than on stock market returns and exchange rate returns. The communication of the unconventional tools proved effective in lowering the bond yields. Interestingly, we document that the effects of non-standard measures for some variables, such as the exchange rate, can be qualitatively different from those resulting from a conventional monetary expansion. Even though the domestic monetary events became more important than the fiscal ones, the latter proved relevant for financial market returns, especially when large-scale immediate fiscal measures and tax deferrals were introduced. We also show that the CE–3 economies were subject to the cross-border transmission of policy announcement effects from the Euro Area and the US, although the magnitude of these effects was smaller than expected and varied across the CE–3 countries.     

Dynamic interdependence of ASEAN5 with G5 stock markets

We find ASEAN5 and G5 stock markets are weakly linked in normal conditions. ASEAN5 markets became more connected with G5 markets during global financial crisis, with stronger conditional correlations, a higher level of risk spillover-connectedness and intensive causal risk dependence. By implications, ASEAN5 stocks are both return enhancers and risk diversifiers in boom market conditions. The diversification benefits remain even during crisis times, albeit lesser. Over the longer term, the diversification benefits of a portfolio that includes both ASEAN5 and G5 stocks are recaptured as market linkages revert to some lower levels due to decreased crisis contagion.     

Macroeconomic factors and emerging market equity returns: a Bayesian model selection approach

Macroeconomics figures prominently in analyses of emerging markets, both as an asset class and for allocations within emerging markets. However, the literature on the drivers of emerging markets equity returns generally pays little attention to macroeconomic factors. This paper investigates the predictive power of several candidate macroeconomic factors for emerging market equity returns using the Bayesian model selection approach developed in Cremers [Cremers, K.J.M., 2002. Stock return predictability: a Bayesian model selection perspective. The Review of Financial Studies 15, 1223–1249]. The results provide strong evidence against all of the macro factors considered with the exception of exchange rate changes and, consistent with the existing literature, provide strong support for several financial factors, but not beta, as significant predictors of excess returns.