Volatility spillovers of unconventional monetary policy to emerging market economies

Emerging market economies (EMEs) have experienced waves of market volatility since the global financial crisis, with some commentators ascribing this at least partly related to monetary policy decisions in advanced economies. This paper examines volatility spillovers from changes in the size of the balance sheets of the Federal Reserve (FED) and European Central Bank (ECB) to EMEs from 2003 to 2018. We find that volatility spillovers to EME currency markets are greater in magnitude from the FED, while EME stock and bond markets are also vulnerable to volatility spillovers in a similar magnitude from both the ECB and the FED. We find only limited evidence of volatility transmission to the real economy of EMEs following the monetary policy actions of the FED and ECB. Finally, we show that the proportion of the volatility in EMEs that is accounted for by changes in FED and ECB balance sheets shifts over time. Our paper has important policy implications for EMEs, notably in respect of volatility transmission channels.     

Volatility and Market Risk of Rubber Price in Malaysia: Pre- and Post-Global Financial Crisis

The volatility in rubber price is a significant risk to producers, traders, consumers and others who are involved in the production and marketing of natural rubber. Such being the case, forecasting the rubber price volatility is desired to assist in decision-making in this uncertain situation. The 2008 Global Financial Crisis caused some disruptions and uncertainties in the future supply or demand for natural rubber and thus leading to higher rubber price volatility. Using ARCH-type models, this paper intends to model the dynamics of the price volatility of Standard Malaysia Rubber Grade 20 (SMR 20) in the Malaysian market before and after the Global Financial Crisis. Additionally, Value-at-Risk (VaR) approach is implemented to evaluate the market risk of SMR 20. Our empirical result denotes the existence of volatility clustering and long memory volatility in the SMR 20 market for both crisis periods. Leverage effect is also detected in the SMR 20 market where negative innovations (bad news) have a larger impact on the volatility than positive innovations (good news) for post-crisis period. When tested with Superior Predictive Ability (SPA) test, FIGARCH model is the best model across five loss functions for short- and long-term forecasts for pre-crisis period. Meanwhile, over post-crisis period, FIGARCH and GJR GARCH indicate the superior out-of-sample-forecast results and better forecasting accuracy over short- and long-term horizons, respectively. In terms of market risk, the short trading position encounters higher risk or greater losses than the long trading position at both 1 and 5 % VaR quantile for pre-crisis period. In contrast, over post-crisis period, long traders of rubber SMR 20 tend to face limited gains but unlimited losses.

     

Volatility spillovers and connectedness among credit default swap sector indexes

This article studies volatility spill-over effects and market connectedness using daily data of credit default swap spreads for U.S. companies over a period from 2007 to 2012. We quantify volatility spillovers by means of an unconditional analysis performed using the entire sample, and a conditional analysis which estimates the model using a rolling window. As our database contains the global financial crisis (GFC), we are able to determine how volatility spillovers spread in the economy during the recent market turmoil. Our unconditional results confirm that the Financials sector was a main contributor to the overall market volatility along with the Consumer Goods, Consumer Services and Basic Materials sectors. The conditional analysis clearly identifies that the Financials was the major feeding sector of volatility spill-over effects, and that the market volatility was successively driven by Technology and Basic Materials over a rather short period of time, followed by Consumer Goods and Consumer Services over a prolonged period of time. Our results illustrate indirect linkages between the sectors that conveyed shocks during the GFC.     

Intraday bidirectional volatility spillover across international stock markets: does the global financial crisis matter?

This article studies volatility spillover between the US and the three largest European stock markets (Frankfurt, London and Paris) around the time of the recent Subprime crisis. In order to investigate the impact of the latter, we break our sample down into two sub-periods: a pre-crisis period and a post-crisis period, using a structural break test that has the advantage of endogenously testing for further breaks in the data. Unlike previous studies that have frequently investigated this issue using low frequency data, our article makes use of intraday data. Accordingly, using Threshold generalized autoregressive conditional heteroscedasticity (GARCH) model estimations, we find weak evidence of volatility transmission between the two regions before the Subprime crisis. However, during the post-crisis period, we record returns and volatility spillover from US to European markets and vice versa at different times of the trading day, indicating that the two regions became more dependent during the recent Subprime crisis, a finding that supports the contagion hypothesis between the US and European stock markets.     

Volatility spillovers to the emerging financial markets during taper talk and actual tapering

On 22 May 2013, Fed chairman, Ben Bernanke surprised markets by indicating to the media that the US Fed may taper its quantitative easing programme. This set out financial volatility across the globe over the next several months that spilled over to the financial markets of emerging market economies (EMEs). It prompted many EME central banks to take varied policy actions. Looking into this widely known event, this article presents formal empirical evidence establishing that (i) conditional volatility during taper talk exceeded that during actual tapering and (ii) volatility spillovers took place ‘contemporaneously’ from the US markets to the key EMEs during this period. The results suggest importance of careful communications by advanced economy central banks and the possibility of establishing ‘rules of the monetary game’. They also suggest that in the absence of international policy coordination to contain spillovers, EME central banks should build adequate buffers and reinforce financial stability ahead of the reversal of the global interest rate cycle.     

Impacts of China's crash on Asia-Pacific financial integration: Volatility interdependence,information transmission and market co-movement

This paper examines the price and volatility dynamics between China and major stock markets in the Asia-Pacific, investigating the effects of the Chinese stock market crash (2015–2016) for the first time. Employing the Bayesian VAR and BEKK GARCH, we observe that price and volatility spillover behaviours are different during the stable and stress periods. Particularly, price spillovers from China to other regional markets are more significant during a bullish period, showing that ‘good news’ emanating from China has strong impacts on its neighbours during better market condition. In the turbulent period, we observe strong shock spillover effects and enhanced volatility spillovers from China to most Asia-Pacific stock markets. This is because China, as an important trading partner and strategic financial centre shows to exert significant influence on the Asia-Pacific region through various economic channels. We also find that the Asia-Pacific stock markets spill over their shocks to China during the crisis, indicating that China is becoming more integrated with the regional financial markets.     

Volatility Spillovers and Contagion from Mature to Emerging Stock Markets

This paper models volatility spillovers from mature to emerging stock markets, tests for changes in the transmission mechanism during turbulences in mature markets, and examines the implications for conditional correlations between mature and emerging market returns. Tri‐variate GARCH–BEKK models of returns in mature, regional emerging, and local emerging markets are estimated for 41 emerging market economies (EMEs). Wald tests suggest that mature market volatility affects conditional variances in many emerging markets. Moreover, spillover parameters change during turbulent episodes. In the majority of the sample EMEs, conditional correlations between local and mature markets increase during these episodes. While conditional variances in local markets rise as well, volatility in mature markets rises more, and this shift is the main factor behind the increase in conditional correlations. With few exceptions, conditional beta coefficients between mature and emerging markets tend to be unchanged or lower during turbulences.     

Momentum or market? Determinants of large stock price changes in an emerging market

The aim of this study is to investigate the determinants of large price changes in Turkey. We also provide additional evidence on determinants of large price changes in different macroeconomic environments, specifically on the pre-crisis and post-crisis periods. Using recurrent event analysis with stratified observations and frailty effects, our findings suggest that momentum has a significant impact on large price changes during both pre-crisis and post-crisis periods. However, the impact of market is more significant on the estimation of large price declines in the pre-crisis period and of large price increases in the post-crisis period. Additional findings suggest that liquidity and market-to-book ratio have positive, firm size has a negative impact on likelihood of large price changes regardless of the direction of the stock price change and macroeconomic environment. Findings of this study provide new insights into the understanding of large price changes in an emerging market.     

期货市场与现货市场之间的价格研究--中国农产品市场的经验

本文借助于信息共享模型与波动溢出效应模型对我国大豆和小麦的期、现货市场之间的价格发现进行了多层次的实证研究,定量描述了期、现货市场在价格发现中作用的大小,深入刻画了我国农产品期、现货市场之间的动态关系.研究结果显示:大豆期、现货价格之间存在双向引导关系,小麦仅存在期货对现货的单向引导关系;期、现货市场均扮演着重要的价格发现角色,且期货市场在价格发现中处于主导地位;期、现货市场之间均存在双向波动溢出关系,但现货市场来自期货市场的波动溢出效应均强于期货市场来自现货市场的波动溢出效应;并且,随着期货市场的发展,期、现货市场之间的波动溢出程度均呈逐渐增强态势.     

Determinants of stock market comovements among US and emerging economies during the US financial crisis

By analyzing the dynamic conditional correlations (DCC) of the daily stock returns of 10 emerging economies in comparison with those of the US for the period of 2006–2010, we find different patterns of crisis spillover among 10 emerging economies. While a group of countries has three distinctive phases of crisis spillover (contagion, herding, and post-crisis adjustment), other groups show different phases of crisis spillover. It is also shown that increases in CDS spread and TED spread decrease conditional correlations while increases in foreign institutional investment, exchange market volatility, and the VIX index of the S&P 500 increase conditional correlations.     

Volatility spillovers across daytime and overnight information between China and world equity markets

This article explores the transmission of daytime and overnight information in terms of returns and volatility between Chinese and Asian, European and North American main stock markets. We propose a bivariate analysis with China as benchmark. By testing the constancy of the conditional correlations, we use an extended constant or dynamic conditional correlation GARCH model. The empirical findings show that across the daytime information transmissions, the relationships between China and Asian markets are closer than China and non-Asian markets, whereas through the overnight information transmissions these relationships are inverse. The analysis provides, before the crisis, that the overnight volatility spillover effects are from China to the United States and the United Kingdom. During the crisis, China affects the United Kingdom in terms of daytime volatility spillovers, whereas in terms of overnight volatility spillovers China affects the United States and is influenced by Japan. After the crisis, daytime volatility spillovers are from Taiwan to China, whereas the overnight volatility spillover effects are from China to the United States and the United Kingdom.     

Post-crisis credit slowdown in South-East Europe: return to normality?

What explains the post-crisis slowdown in bank credit to private sector in the South-East European economies? We try to answer this question, by comparing the actual credit growth to the fundamental and equilibrium growths. The fundamental growth is defined as the growth justified by the fundamentals, the equilibrium growth—as the growth consistent with the economy being in medium-term equilibrium. Results suggest that the slowdown reflects both return of the credit activity to its fundamental value, and return of the fundamental values to their equilibrium levels, after years of excessiveness during the pre-crisis period. Rapid credit growth, as in the pre-crisis period, should not be expected in the near future.     

THE DYNAMIC RELATION BETWEEN RETURNS,TRADING VOLUME,AND VOLATILITY: LESSONS FROM SPILLOVERS BETWEEN ASIA AND THE UNITED STATES

This paper investigates the dynamic relationship between index returns, return volatility, and trading volume for eight Asian markets and the US. We find cross‐border spillovers in returns to be non‐existent, spillovers in absolute returns between Asia and the US to be strong in both directions, and spillovers in volatility to run from Asia to the US. Trading volume, especially on the Asian markets, depends on shocks in domestic and foreign returns as well as on volatility, especially those shocks originating in the US. However, only weak evidence is found for trading volume influencing other variables. In the light of the theoretical models, these results suggest sequential information arrivals, with investors being overconfident and applying positive feedback strategy. Furthermore, new information causes price volatility to rise due to differences in its interpretation among traders, but the subsequent market reaction takes the form of adjustment in price level, not volatility. Lastly, the intensity of cross‐border spillovers seems to have increased following the 1997 crisis, which we interpret as evidence of increased noisiness in prices and diversity in opinions about news originating abroad. Our findings might also help to understand the nature of financial crises, to predict their further developments and consequences.     

中国农产品价格波动对CPI的影响分析

近期引起中国农产品价格上涨的诱因很多。通过2006年1月—2011年8月的月度数据检验金融危机前、危机期间和危机后农产品价格与居民消费物价指数的互动关系表明,三个阶段的二者关系变化显著,而且危机前后农产品价格对CPI的影响比危机期间更明显,这一结果反映出当前中国农产品品质不能适应消费者对农产品质量的需求。     

Fiscal response to the COVID-19 crisis in advanced and emerging market economies†

The fiscal policy response to the COVID-19 crisis was swift and strong, in tandem with monetary policy. Advanced economies (AEs) deployed a much larger fiscal response than emerging market economies (EMEs) throughout the pandemic. This study focuses on the drivers of this divergent fiscal response in the first months of the pandemic. Apart from the fact that EMEs entered the crisis later than AEs, narrower fiscal policy space in EMEs, further reduced by the tightening of their financing conditions in the early stages of the pandemic, constrained their fiscal response. The size and composition of the fiscal response also depended on some structural factors, such as the level of income, the strength of the social safety nets and automatic stabilisers.     

Domestic and global output gaps as inflation drivers: What does the Phillips curve tell?

We study how domestic and global output gaps affect CPI inflation. We use a New-Keynesian Phillips curve framework which controls for non-linear exchange rate movements for a panel of 26 advanced and 22 emerging economies covering the 1994Q1−2017Q4 period. We find that both global and domestic output gaps are significant drivers of inflation both in the pre-crisis (1994–2008) and post-crisis (2008–2017) periods. Furthermore, after the crisis, in advanced economies the effect of the domestic output gap declines, while in emerging economies the effect of the global output gap declines. Our results suggest that emerging and advanced economies have become more similar to each other in terms of output gaps as inflation drivers. The paper demonstrates the usefulness of the New Keynesian Phillips curve in identifying the impact of global and domestic output gaps on inflation.     

Does external shock trigger systemic banking distress?

Before 2007, many studies claimed that wide-scale banking distress in various countries was preceded and could be predicted by deteriorating macroeconomic indicators such as falling GDP growth rate. However, these researches were mostly based on “event studies” which identified crises too late. By using banking sector asset price data, the paper finds that economies still thrive in the “pre-crisis” period in terms of increasing GDP growth. The slowdown of economy in terms of a fall in GDP growth is generally associated with the post-crisis period coinciding with the bubble burst process. Thus, this result supports the policy view that it is not useful to postpone macroeconomic stability to conceal banking sector weakness.     

Return and volatility spillovers between china and world oil markets

We examine return and volatility spillovers between China and world oil markets. This topic is of great importance because China is the world's second-largest oil importer and has exhibited substantial growth in oil consumption. Extending Diebold and Yilmaz's (2012) method of catching spillover dynamics, it is found that return and volatility spillovers between China and world oil markets are bi-directional and asymmetric. The Chinese oil market is highly affected by world oil markets and exerts an influence on world oil markets, although to a lesser extent. Moreover, the volatility spillover index has increased significantly since the peak of the last financial crisis in September 2008. Although the US oil market impacts China's market most in terms of spillover, the influence of China's oil market on the world oil market has intensified in recent years.     

The Impact of the GFC on Sectoral Market Efficiency: Non‐linear Testing for the Case of Australia

This paper investigates the efficiency of the Australian stock market during the period of volatility and disruption associated with the Global Financial Crises (GFC). Furthermore, the investigation seeks to observe any divergence in market efficiency between industry sectors that demonstrate differing economic performance across the period. Spanning a time period of 2000–2015, the data are split into three periods of distinct economic conditions: a pre‐crisis period of relatively high growth, the GFC period of disruption and contraction, and a post‐GFC period of relatively low growth. Five sector indices listed on the Australian Securities Exchange are analysed to search for evidence of market efficiency (Real Estate, Consumer Discretionary, Financials, Materials, and Metals and Mining). A range of non‐linear tests are applied in order to systematically investigate the structure of the market in each sector. The results highlight the cointegrated nature of non‐linearity across related sectors, and also demonstrate that different industries within the same economy can reveal highly diverse patterns of non‐linearity and market efficiency in response to financial crisis.     

Fed and ECB monetary policy spillovers to Emerging Market Economies

This paper presents evidence that the international spillovers of both Fed and ECB conventional monetary policies to Emerging Market Economies (EMEs) are global. The result comes from the panel Bayesian Vector Autoregressive (BVAR) model estimated for EMEs in which we control i.a. for foreign central banks’ policy shocks. Furthermore, in the separate BVAR model for Central and Eastern European (CEE) countries we show that the ECB is the main foreign central bank for these economies — after controlling for its shocks, their Fed counterparts play a very moderate role in driving GDP and prices in CEE.