Networks and equity market integration: European evidence

Deregulation, globalization, and technological developments have altered the business strategies of stock exchanges around the world. We investigate whether the adoption of network strategies by stock exchanges creates additional value in the provision of trading services. Using unbalanced panel data from all major European exchanges over the period 1996-2000, we examine the consequences of network cooperation on a number of stock market performance measures. We show that adopting a network strategy is associated with higher market capitalization, lower transaction costs, higher growth, and enhanced international stock market integration.     

The European Union,the Euro,and equity market integration

We use industry valuation differentials across European countries to study the impact of membership in the European Union as well as the Eurozone on both economic and financial integration. In integrated markets, discount rates and expected growth opportunities should be similar within one industry, irrespective of the country, implying narrowing valuation differentials as countries become more integrated. Our analysis of the 1990–2007 period shows that membership in the EU significantly lowered discount rate and expected earnings growth differentials across countries. In contrast, the adoption of the Euro was not associated with increased integration. Our results do not change when the sample is extended to include the recent crisis period.     

Implied volatility index for the Norwegian equity market

We introduce and evaluate the NOVIX - an implied volatility index for the Norwegian equity index OBX. NOVIX is created according to the VIX methodology. We compare the NOVIX to the German VDAX-NEW and the U.S. VIX and find that NOVIX has similar properties as these two indices. We also evaluate the VIX, VDAX-NEW and NOVIX in terms of volatility forecasting. As a benchmark model we use a precise HAR model of Corsi (2009) based on high-frequency data. All three implied volatility indices significantly improve daily, weekly and monthly forecasts of volatility of their underlying equity indices. This improvement is largest for the VIX, followed by VDAX-NEW and NOVIX.     

Dynamic correlations and volatility effects in the Balkan equity markets

This paper investigates the presence of time-varying comovements, volatility implications and dynamic correlations in major Balkan and leading mature equity markets, in order to provide quantified responses to international asset allocation decisions. Since asset returns and correlation dynamics are critical inputs in asset pricing, portfolio management and risk hedging, emphasis is placed on the respective (constant and dynamic) equity market correlations produced by alternative multivariate GARCH forms, the Constant Conditional Correlation and the Asymmetric Dynamic Conditional Correlation models. The Balkan stock markets are seen to exhibit time-varying correlations as a peer group, although correlations with the mature markets remain relatively modest. In conjunction with sensitivity analysis on the asymmetric variance–covariance matrix, active portfolio diversification to the Balkan equity markets indicates to potentially improve investors’ risk-return trade-off.     

Global equity market leadership positions through implied volatility measures

Using unique minute-by-minute data on six major country implied volatility series, we examine the spillovers and the leadership positions of the global stock exchanges through measuring and assigning the contributions of innovations among their implied volatilities. The entire analyses are performed on synchronized transactions. A hybrid leadership methodology that is computationally efficient is employed. In nearly all cases, the findings indicate a clear relative leadership position for one or more exchanges. These, in turn, provide important insights into the operations of the markets and convey the dynamic process among them. We also address the transmission mechanism and volatility efficiency.     

The pricing of volatility risk in the US equity market

We analyze whether the pricing of volatility risk depends on the asset pricing framework applied in the tests, the specified volatility proxies, and the portfolio sorts used for spanning the asset universe. For this purpose, we compare the results using a macroeconomic and fundamental based asset pricing model using three proxies of volatility and uncertainty, using size/value sorted and industry sector portfolios. Our results reveal that the marginal pricing effect of the VIX volatility factor is strong and statistically significant throughout the models and specifications, while the effect of an EGARCH-based volatility factor is mixed, mostly smaller but with the correct sign. In most cases, the EGARCH factor does not impair the pricing effect of the VIX. The portfolio sorts have a substantial impact on the volatility premiums in both model frameworks. The size of the volatility risk premium is more uniform across the models if the industry sector portfolio sort is used. Finally, the size/value portfolio sort generates larger volatility risk premiums for both models.     

Modelling time varying volatility spillovers and conditional correlations across commodity metal futures

This paper examines how the most prevalent stochastic properties of key metal futures returns have been affected by the recent financial crisis using both mapped and unmapped data. Our results suggest that copper and gold futures returns exhibit time-varying persistence in their corresponding conditional volatilities over the crisis period; in particular, such persistence increases during periods of high volatility compared with low volatility. The estimation of a bivariate GARCH model further shows the existence of time-varying volatility spillovers between these returns during the different stages of such a crisis. Our results, which are broadly the same in relation to the use of mapped or unmapped data, suggest that the volatilities of copper and gold are inherently linked, although these metals have very different applications.     

Explaining international stock correlations with CPI fluctuations and market volatility

This paper investigates the dynamic correlations among six international stock market indices and their relationship to inflation fluctuation and market volatility. The current research uses a newly developed time series model, the Double Smooth Transition Conditional Correlation with Conditional Auto Regressive Range (DSTCC-CARR) model. Findings reveal that international stock correlations are significantly time-varying and the evolution among them is related to cyclical fluctuations of inflation rates and stock volatility. The higher/lower correlations emerge between countries when both countries experience a contractionary/expansionary phase or higher/lower volatilities.     

On the relationship between conditional jump intensity and diffusive volatility

In standard options pricing models that include jump components to capture large price changes, the conditional jump intensity is typically specified as an increasing function of the diffusive volatility. We conduct model-free estimation and tests of the relationship between jump intensity and diffusive volatility. Simulation analysis confirms that the tests have power to reject the null hypothesis of no relationship if data are generated with the relationship. Applying the method to a few stock indexes and individual stocks, however, we find little evidence that jump intensity positively depends on diffusive volatility as a general property of the jump intensity. The findings of the paper give impetus to improving the specification of jump dynamics in options pricing models.     

Trading volume,time-varying conditional volatility,and asymmetric volatility spillover in the Saudi stock market

Despite the well known importance of volatility–volume relationship, there is a paucity of research on this topic in emerging markets. We attempt to partially fill this gap by investigating volatility–volume relationship in the most important exchange market in the Middle East. We test the effect of trading volume on the persistence of the time-varying conditional volatility of returns in the Saudi stock market. Overall our results support the mixture of distribution hypothesis at the firm level. We also use two different proxies for information arrival, intra-day volatility, and overnight indicators. We find that these are good proxies for information and are important as contemporaneous volume in explaining conditional volatility. We also test for the volatility spillover direction between large- and small-cap portfolios. Our results show that the spillover effect is larger and statistically significant from large to small companies.     

EMU and European government bond market integration

In this study we adopt the CAPM-based model of Bekaert and Harvey (1995) to compare the differences in the relative importance of two sources of systemic risk (world and Eurozone) on Government bond returns, in two groups of countries in EU-15. Results show that euro markets are less vulnerable to the influence of world risk factors, and more vulnerable to EMU risk factors. However, they are only partially integrated. For their part, the markets of the countries that decided to stay out of the Monetary Union present a higher vulnerability to external risk factors.     

International equity market integration: Theory, evidence and implications

We survey the literature on international equity market integration. In doing so, we examine the theory of integration, the burgeoning literature on empirical evidence, and the implications. It is clear from our review that significant methodological advances in recent years have provided a new perspective on the degree of such integration. Among the most important implications of the rapidly amassing evidence of substantial integration among both the developed and the emerging markets is the need for international investors to carefully monitor the risk associated with varying benefits of diversification.     

The equity premium and market integration: Evidence from international data

This paper examines the equity premium puzzle by looking at stock market data from 39 countries. For each of these countries, average total return as well as excess returns was estimated for the past 20–30 years. I find that emerging markets have higher excess returns than developed markets, but when adjusted for risk developed markets have higher returns. I test the theory that degree of integration with global markets is a major explanatory factor for differences in excess returns, as the demand for domestic equities may be greater in countries that are less integrated and thus have less access to alternative overseas assets. I find a positive relationship between degree of integration and excess returns, which is evidence in favor of this theory.     

European equity markets volatility spillover: Destabilizing energy risk is the new normal

While energy risk is increasingly recognized as a systemic risk, there is limited comprehensive analysis of the risk propagation in regional contexts. In this study, we examine oil and natural gas price changes and shocks in relation to equity market returns and volatility for 24 European Economic Area (EEA) countries. In addition to traditional panel regressions, we also deploy the Diebold-Yilmaz (2014) spillover index for a closed network analysis. We differentiate in the cross-section across the core EU block, PIIGS countries, EU enlargement countries joining after 2004, and other non-EU countries, to provide insights into the ongoing debates on the European energy market stability. While we find evidence of the manifestation of energy risk throughout the sample period, we find that until 2019 the primary sources of volatility spillover in the EEA economic network arose from economic or political uncertainty. Energy risks, measured by large crude oil and natural gas price shocks also significantly contributed to equity market volatility, with increasing volatility risk arising from natural gas, a green labelled energy source after 2019. Last, we show that CEEC equity markets are more sensitive to oil and natural gas price shocks when domestic currencies depreciate against the Euro.     

Testing for international equity market integration using regime switching cointegration techniques

Using MSCI total return index data, this paper analyses the degree of international equity market integration using modern cointegration techniques. The existence of a long run equilibrium across equity markets is important since it implies a violation of weak form market efficiency. Short run deviations away from equilibrium can be expected to reverse, thereby implying a degree of market predictability. This analysis adds to the existing literature by considering a regime switching cointegration relationship that allows for multiple structural breaks over time. The analysis provides scant evidence in favour of market integration with a single regime treatment. There is, however, significant evidence to support a two-regime Markov switching long-run equilibrium relationship that has evolved since the 1970s.     

Stock market integration and volatility spillover: India and its major Asian counterparts

Stock market integration and volatility spillover between India and its major Asian counterparties is studied. Apart from different degrees of correlations, contemporaneous intraday return spillovers between India and its Asian counterparts are found to be positively significant and bi-directional. Hong Kong, Korea, Singapore and Thailand are found to be four Asian markets from where there is significant flow of information in India. Though most of the information gets transmitted between the markets without much delay, some amount of information still remains unsent and is found to be successfully transmitted as soon as the domestic market opens in the next day.     

Stock market volatility and equity returns: Evidence from a two-state Markov-switching model with regressors

This paper proposes a two-state Markov-switching model for stock market returns in which the state-dependent expected returns, their variance and associated regime-switching dynamics are allowed to respond to market information. More specifically, we apply this model to examine the explanatory and predictive power of price range and trading volume for return volatility. Our findings indicate that a negative relation between equity market returns and volatility prevails even after having controlled for the time-varying determinants of conditional volatility within each regime. We also find an asymmetry in the effect of price range on intra- and inter-regime return volatility. While price range has a stronger effect in the high volatility state, it appears to significantly affect only the transition probabilities when the stock market is in the low volatility state but not in the high volatility state. Finally, we provide evidence consistent with the ‘rebound’ model of asset returns proposed by Samuelson (1991), suggesting that long-horizon investors are expected to invest more in risky assets than short-horizon investors.     

Herding and market volatility

In this paper, we explore the impact of investor herding behavior on stock market volatility. We adopt a direct herding measure based on the variation of cross-sectional stock betas. The measure can be readily separated into positive and adverse components, whereby investors herd towards and away from the market portfolio, respectively. Using A-shares listed in the Chinese equity market from August 2005 to March 2021, we show that the market volatility is Granger caused by the measure, and that there exists an asymmetric effect between positive and adverse herding on volatility. Furthermore, we provide robust evidence that the information contained in the herding measure helps generate significantly improved volatility forecasts and add economic value to investors. Our paper not only contributes to the volatility forecasting literature but also advances our understanding of herding in the equity market.     

Skewness-based market integration: A systemic risk measure across international equity markets

This study develops a novel skewness-based integration measure to assess systemic risk across international equity markets. We exploit skewness to further consider the tail information of return distribution, thereby extend the return-based integration measure of Pukthuanthong and Roll (2009). The empirical results indicate that the skewness-based integration measure is closely correlated with market crashes, Value-at-Risk, and leading indicators of equity markets. Moreover, the skewness-based integration measure improves the information content of systemic risk relative to the return-based integration measure, implying that tail information plays an indispensable role in early warning of systemic risk.     

Asymmetric volatility and risk in equity markets

It appears that volatility in equity markets is asymmetric:returns and conditional volatility are negatively correlated.We provide a unified framework to simultaneously investigateasymmetric volatility at the firm and the market level and toexamine two potential explanations of the asymmetry: leverageeffects and volatility feedback. Our empirical application usesthe market portfolio and portfolios with different leverageconstructed from Nikkei 225 stocks. We reject the pure leveragemodel of Christie (1982) and find support for a volatility feedbackstory. Volatility feedback at the firm level is enhanced bystrong asymmetries in conditional covariances. Conditional betasdo not show significant asymmetries. We document the risk premiumimplications of these findings.