Spillovers between sovereign CDS and exchange rate markets: The role of market fear

As important variables in financial market, sovereign credit default swaps (CDS) and exchange rate have correlations and spillovers. And the volatility spillovers between the two markets become further complicated with the effect of market fear caused by extreme events such as global pandemic. This paper attempts to explore the complex interactions within the “sovereign CDS-exchange rate” system by adopting the forecast error variance decomposition method. The results show that there is a relatively close linkage between the two markets and the total spillover index of the system is dynamic. For most of the past, the exchange rate has a higher spillover effect on the sovereign CDS than vice versa. Moreover, after the market fear variables are introduced, the “sovereign CDS-exchange rate” system and market fear variables present bidirectional spillovers. The results of the study have particular significance for maintaining the financial stability and preventing risk contagion between markets.     

Volatility spillovers among the U.S. and Asian stock markets: A comparison between the periods of Asian currency crisis and subprime credit crisis

This paper examines the changing nature of volatility spillovers among the U.S. and eight East Asian stock markets between two financial crises: the Asian currency crisis and the U.S. subprime credit crisis. Our empirical results suggest that volatility is not always spilled over from the directly affected markets to surrounding markets in crisis periods. The East Asian markets who directly suffered from the Asian currency crisis are the ones to which volatility is spilled over from other markets during the Asian currency crisis period, whereas uni-directional volatility spillovers from the U.S. market to other markets are observed during both crisis periods. This difference can be explained by a pre-determined hierarchy in which volatility spillovers tend to start from the U.S. market regardless of the geographical origin of the crisis. Furthermore, our results reveal that the markets in three major Asian financial hubs, i.e., Japan, Hong Kong and Singapore, are the markets to which volatility is spilled over uni-directionally from several other countries during the subprime credit crisis period, but not during the Asian currency crisis period. We attribute this difference to crisis-specific (currency or credit crisis), market-specific (credit derivatives market participation and foreign currency reserves), and time-specific (more integrated global market) factors.     

Value at risk models for volatile emerging markets equity portfolios

This paper investigates the issue of market risk quantification for emerging and developed market equity portfolios. A very wide spectrum of popular and widely used in practice Value at Risk (VaR) models are evaluated and compared with Extreme Value Theory (EVT) and adaptive filtered models, during normal, crises, and post-crises periods. The results are interesting and indicate that despite the documented differences between emerging and developed markets, the most successful VaR models are common for both asset classes. Furthermore, in the case of the (fatter tailed) emerging market equity portfolios, most VaR models turn out to yield conservative risk forecasts, in contrast to developed market equity portfolios, where most models underestimate the realized VaR. VaR estimation during periods of financial turmoil seems to be a difficult task, particularly in the case of emerging markets and especially for the higher loss quantiles. VaR models seem to be affected less by crises periods in the case of developed markets. The performance of the parametric (non-parametric) VaR models improves (deteriorates) during post-crises periods due to the inclusion of extreme events in the estimation sample.     

The role of the world’s major steel markets in price spillover networks: an analysis based on complex network motifs

In recent years, the international steel market has shown increasingly strong cross-regional correlation. To better understand the price trends of various markets, it is necessary to identify their inherent price spillovers. This paper combines a generalized autoregressive conditional heteroskedasticity Baba–Engle–Kraft–Kroner (GARCH-BEKK) model and complex network motifs to explore the price fluctuations among international steel markets. The study selects steel markets in 12 countries and regions and uses daily data on import and export prices from January 2009 to September 2017 to analyze eight steel products. The results show that spillovers are associated with geographical location, market development, product type and status. Spillovers mostly occur between buyer’s markets; additionally, the Asian market, especially the East Asian market, is in most cases the recipient of spillover, whereas the European Union (EU) market is in most cases the sender of spillover effects. Developed markets have clear spillover effects on emerging markets, sheet steel products have clear spillover effects on profile steel products, and the prices of midstream and downstream products in the industrial chain are the most influenced. This paper examines international steel market relationships from the perspective of price transmission, and the results can help manage and prevent large-scale economic risks.

     

Trilemma policy convergence patterns and output volatility

We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful “trilemma” hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging toward a “middle ground” among emerging market economies, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.     

Contagion in global equity markets in 1998: The effects of the Russian and LTCM crises

The Russian and LTCM financial crises in 1998 originated in bond markets, but rapidly transmitted through international equity markets. A multi-factor model of financial markets with multiple regimes is used to estimate the transmission effects in equity markets due to global, regional and contagious transmission mechanisms during the crises. Using a panel of 10 emerging and industrial financial markets, the empirical results show that contagion is significant and widespread in international equity markets during the LTCM crisis, but is more selective during the Russian crisis. Contagion effects in equities differ to those previously noted in bond markets for this period.     

Dynamic spillovers and linkages between gold,crude oil,S&P 500, and other economic and financial variables. Evidence from the USA

This paper focuses on the price determinants of gold, and on the challenges associated with gold’s safe haven property. Specifically, it analyses the interlinkages and the return spillover effect among gold, crude oil, S&P 500, dollar exchange rate, Consumer Price Index (CPI), economic policy uncertainty and Treasury bills, by employing a Vector Autoregression (VAR) and the spillover index of Diebold and Yilmaz (2012), Diebold and Yılmaz (2014). Monthly realized return series, covering the period from 2nd of January 1986 to 31st of December 2019 are used to examine the short-run linkages, and the return spillovers rolling-window estimates in analyzing the transmission mechanism in a time-varying fashion, respectively. Our findings identify gold as a strong dollar hedge, while crude oil and Treasury bills appear to drive inflation; they also indicate strong spillover effects between exchange rate and gold returns. In general, co-movement dynamics display state-dependent characteristics. Both total and directional spillovers increase significantly during market turbulence caused by severe financial crises such as the Global Financial Crisis (GFC) of 2007–2009 and the European Sovereign Debt Crisis of 2010–2012. Net spillovers switch between positive and negative values for all these markets, implying that the recipient/transmitter position changes drastically with market events. Economic policy uncertainty, stock market returns, and crude oil price returns are the main transmitters, while Treasury bills and CPI are the main return shock recipients. Gold and exchange rate act both as receivers and transmitters over the sample period.     

Analysis of the impact of COVID-19 pandemic on G20 stock markets

We examine the impact of the COVID-19 pandemic on G20 stock markets from multiple perspectives. To measure the impact of COVID-19 on cross-market linkages and deeply explore the dynamic evolution of risk transmission relations and paths among G20 stock markets, we statically and dynamically measure total, net, and pairwise volatility connectedness among G20 stock markets based on the DY approach by Diebold and Yilmaz (2012, 2014). The results indicate that the total volatility connectedness among G20 stock markets increases significantly during the COVID-19 crisis, moreover, the volatility connectedness display dynamic evolution characteristics during different periods of the COVID-19 pandemic. Besides, we also find that the developed markets are the main spillover transmitters while the emerging markets are the main spillover receivers. Furthermore, to capture the impact of COVID-19 on the volatility spillovers of G20 stock markets, we individually apply the spatial econometrics methods to analyze both the direct and indirect effects of COVID-19 on the stock markets’ volatility spillovers based on the “volatility spillover network matrix” innovatively constructed in this paper. The empirical results suggest that stock markets react more strongly to the COVID-19 confirmed cases and cured cases than the death cases. In general, our study offers some reference for both the investors and policymakers to understand the impact of COVID-19 on global stock markets.     

Using CARRX models to study factors affecting the volatilities of Asian equity markets

The range of daily asset prices is often used as a measure of volatility. Using a CARRX (conditional autoregressive range with exogenous variables) model, and the parsimony principle, the paper investigates the factors affecting the volatilities of Asian equity markets. Since the beginning of the new Century, emerging Asian markets such as Taiwan and Shanghai have been undergoing various stages of financial globalization. The volatility of the equity market may not be explained solely by its own dynamics. In this paper, we examine volatility using the following factors: (i) lagged returns; (ii) lagged absolute returns; (iii) own trading volume; (iv) U.S. factors; (v) European factors; and (vi) regional (Asian) factors. Points (i) and (iii) are by and large significant, while (ii) is not. Controlling for (i), (ii) and (iii), we find evidence that the volatility of European markets has spillovers on to both the Taiwan and Tokyo markets, mild evidence that the volatility of the U.S. market has spillovers on to the Hong Kong market, but there are no spillovers from the European or U.S. markets on to the Shanghai market.     

Commodity-price volatility and macroeconomic spillovers: Evidence from nine emerging markets

The recent decade has witnessed wild swings in global commodity prices, with large increases preceding the Global Financial Crisis and steep declines following the crash. Many emerging markets find themselves destabilized by these fluctuations, not only when price increases lead to currency appreciations and reduced competitiveness, but also when price decreases cause capital outflows and deteriorations in the balance of payments. This study examines the volatility processes of six major commodity prices, before applying Multivariate GARCH analysis to examine spillovers among important commodity prices and output, exchange rates, interest rates and inflation in major emerging markets. While each commodity and each country behaves differently, we find that Chile is most closely tied to the copper price, and Indonesia to oil and tin, while neighbors such as Brazil and the Philippines are less affected. Perhaps surprisingly, Russia is found to be highly insulated from fluctuations in world oil prices.     

Contagion effects and risk transmission channels in the housing,stock, interest rate and currency markets: An Empirical Study in China and the U.S.

This paper aims to investigate the crisis linkage and transmission channels within the housing, stock, interest rate and the currency markets in the U.S. and China in the past decade since the 2008 Subprime Mortgage Crisis. Two hybrid models, namely the SWARCH-EVT-Copula and the Bivariate SWARCH-EVT models, are proposed and applied in order to take into account (A) the high/low volatility regimes, (B) the interdependence structure inherited from the joint tail behaviours, as well as, (C) the risk spillover dynamics among financial sectors during market turmoils. We empirically show that the housing and stock markets share the strongest linkage and play central roles in the spreading of shocks. With a highly integrated system, the American financial sectors are under greater exposure to risk contagion and systemic risk during crises than the Chinese markets. Nevertheless, the exchange rate risk of Renminbi remains at an intensive level since its “crawl-like arrangement” and leads to increasing co-movements in the stock and interest rate markets since 2014.     

Modeling dynamic conditional correlations with leverage effects and volatility spillover effects: Evidence from the Chinese and US stock markets affected by the recent trade friction

In this article, we investigate the dynamic conditional correlations (DCCs) with leverage effects and volatility spillover effects that consider time difference and long memory of returns, between the Chinese and US stock markets, in the Sino-US trade friction and previous stable periods. The widespread belief that the developed markets dominate the emerging markets in stock market interactions is challenged by our findings that both the mean and volatility spillovers are bidirectional. We do find that most of the shocks to these DCCs between the two stock markets are symmetric, and all the symmetric shocks to these DCCs are highly persistent between Shanghai’s trading return and S&P 500′s trading or overnight return, however all the shocks to these DCCs are short-lived between S&P 500′s trading return and Shanghai’s trading or overnight return. We also find clear evidence that the DCC between Shanghai’s trading return and S&P 500′s overnight return has a downward trend with a structural break, perhaps due to the “America First” policy, after which it rebounds and fluctuates sharply in the middle and later periods of trade friction. These findings have important implications for investors to pursue profits.     

Central bank transparency and financial market expectations: The case of emerging markets

In this paper, we study how central bank transparency influences the formation of money market expectations in emerging markets. The sample covers 25 countries for the period from January 1998 to December 2009. We find, first, that transparency reduces the bias (the difference between the money market rate and the weighted expected target rate over the contract period) in money market expectations. The effect is larger for countries with no exchange rate peg and countries with low income. Second, an intermediate level of transparency is found to have the most favorable influence on money market expectations: neither complete secrecy nor complete transparency is optimal. Finally, all subcategories of the Eijffinger and Geraats (2006) index lead to a smaller bias in expectations, with political transparency having the largest effect.     

Direct and indirect effects of FDI in emerging European markets: A survey and meta-analysis

We review a large body of literature dealing with the effects of Foreign Direct Investment (FDI) on economies during their transformation from a command economic system toward a market system. We report the results of a meta-analysis based on the literature on externalities from FDI. The studies on emerging European markets covered in our survey report direct and indirect FDI effects weakening over time, similarly as in other FDI destination countries. This is imputable to a publication bias that is detected and to the fact that more sophisticated methods and more controls can be used once a sufficient time span is available. Panel studies are likely to find relatively lower spillover effects. The choice of the research design (definition of firm performance and foreign firm presence) matters. More specific to the sampled studies is the role played by forward and backward spillovers which dominate other channels in driving FDI externalities.     

International spillovers in global asset markets

The paper empirically estimates the financial transmission within and across bond and equity markets in the four largest global financial markets – the United States, the Euro area, Japan, and the United Kingdom. We argue that international bond and equity markets are highly interconnected both within and across asset classes in a globalized world, where the complex transmission process across various financial assets is not restricted to just the domestic market. This paper employs identification through generalized forecast error variance decompositions to estimate spillovers across four systemic markets in a Vector Autoregression (VAR) framework. We find that asset prices react most strongly to international shocks within the same asset class, but that there are also substantial international spillovers across asset classes. Rolling estimations analysis provides evidence that global asset markets have become more integrated and that the bilateral relationships change over time. Our results are robust to specifications that take into account the monetary policy stance and include foreign exchange markets.     

Market Evolution and Economic Development

A bstract This paper seeks to integrate the concepts of embedded exchange and impersonal exchange via the notion of integrated markets. The more integrated market exchange is, the more likely that each potential actor in the exchange process is linked to a large number of others. As a result, it is less likely that buyers and sellers will choose to cheat each other, and market exchange thrives. Integration occurs as a result of bridging structural holes in social networks and is carried out by entrepreneurial middlemen. Their activities are characterized by significant increasing returns to scale. Thus coordination is likely to be necessary for integrated markets to develop.     

Low interest rate policy and the use of reserve requirements in emerging markets

This paper sheds light on the link between the interest rate policy in large advanced economies with international funding and reserve currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012, we provide evidence that emerging market central banks tend to raise reserve requirements when interest rates in international funding markets decline or financial inflows accelerate, most likely to preserve financial stability. In contrast, when global liquidity risk rises and funding from the large advanced economies dries up, emerging markets lower reserve requirements.     

Spatial spillover effects and risk contagion around G20 stock markets based on volatility network

Employing the spatial econometric model as well as the complex network theory, this study investigates the spatial spillovers of volatility among G20 stock markets and explores the influential factors of financial risk. To achieve this objective, we use GARCH-BEKK model to construct the volatility network of G20 stock markets, and calculate the Bonacich centrality to capture the most active and influential nodes. Finally, we innovatively use the volatility network matrix as spatial weight matrix and establish spatial Durbin model to measure the direct and spatial spillover effects. We highlight several key observations: there are significant spatial spillover effects in global stock markets; volatility spillover network exists aggregation effects, hierarchical structure and dynamic evolution features; the risk contagion capability of traditional financial power countries falls, while that of “financial small countries” rises; stock market volatility, government debt and inflation are positively correlated with systemic risk, while current account and macroeconomic performance are negatively correlated; the indirect spillover effects of all explanatory variables on systemic risk are greater than the direct spillover effects.     

Cointegration and joint efficiency of international commodity markets

This paper investigates the semi-strong efficiency hypothesis in the international commodity markets of four industrialized countries, using vector autoregression (VAR) and cointegration techniques. Efficiency in these markets requires the corresponding real exchange rates to be martingales with respect to any information set available in the public domain. In the context of a VAR consisting only of real exchange rates, we show that necessary and sufficient conditions for joint efficiency of all the markets under consideration amount to the VAR being of order one (Markovness) and non-cointegrated. On the contrary, in a VAR extended by other potentially “relevant” variables, such as the corresponding real interest rates, non-cointegration and Markovness are only sufficient conditions for the same commodity markets to be characterized as jointly efficient. We also suggest methods for efficiency testing in each individual market within a cointegrated VAR and, finally, we discuss possible long-run linkages among the real exchange rates and real interest rates in association with efficiency in the commodity markets. JEL Classification Number: F31     

Region-wide connectedness of Asian equity and currency markets

This study systemically analyzes the dynamics of interdependence between the Asian equity and currency markets. The novelty of our study is that unlike other studies that explore either co-movements among equity markets or co-movements among currency markets, we pay particular attention to the interdependence between the two in terms of both return and volatility connectedness. We find that the contribution of crossspillovers between the Asian equities and currencies is substantial for the region-wide connectedness of both the returns and volatilities. We also find that the short-term spillovers are far more important for the return spillovers, while the long-term spillovers are far more important for the volatility spillovers, presumably reflecting the long-lasting effects of volatility shocks. All the results consistently underline the pivotal role of cross-interdependence between equity and currency markets, both as channels for integrating Asian financial markets and as sources of financial contagion across these markets. Our findings will provide useful guidance for portfolio risk management to adopt better hedging strategies for foreign exchange risks involved in the international investment of Asian equities.