Analysis of real GDP growth rates of greater China: An asymmetric conditional volatility approach

Most empirical studies of real gross domestic product (GDP) growth rates exclude the dimension of conditional volatility shocks. In this paper, we search for evidence of conditional volatility in the quarterly real GDP of greater China, which comprises the economies of Mainland China, the Hong Kong Special Administrative Region (SAR), and Taiwan. The widely accepted exponential GARCH model of Nelson [Econometrica 59 (1991) 347–370] is employed to capture the possible existence of asymmetric conditional volatility in real GDP. It is found that negative real GDP shocks may induce a greater impact on future volatilities compared with positive shocks of the same magnitude. Policy implications from our findings are discussed.     

RISK–RETURN TRADE‐OFF AND BEHAVIOUR OF VOLATILITY ON THE SOUTH AFRICAN STOCK MARKET: EVIDENCE FROM BOTH AGGREGATE AND DISAGGREGATE DATA

The study analyses the nature and behaviour of volatility, the risk–return relationship and the long‐term trend of volatility on the South African equity markets using aggregate level, industrial level and sectoral level daily data for the period 1995‐2009. By employing dummy variables for the Asian and the sub‐prime financial crises and the 11 September political shock, the study further examines whether the long‐term trend of volatility structurally breaks during financial crises and major political shocks. Three time‐varying generalised autoregressive conditional heteroskedasticity models were employed: one of them symmetric, and the other two asymmetric. Each of these models was estimated based on three error distributional assumptions. The findings of the study are as follows: First, volatility is largely persistent and asymmetric. Second, risk at both aggregate and disaggregate level is generally not a priced factor on the South Africa (SA) stock market. Third, the threshold autoregressive conditional heteroscedasticity (TARCH) model under the generalised error distribution is the most appropriate model for conditional volatility of the SA stock market. Fourth, volatility generally increases over time, and its trend structurally breaks during financial crises and major global shocks. The policy and investment implications of the findings are outlined.     

Equity Risk Premium Puzzle: Evidence from Indonesia and Sri Lanka

This paper investigates the equity risk premium puzzle in the Indonesian and Sri Lankan stock markets in order to identify the relationship between the volatility of excess returns and the equity risk premium. The asymmetric impact of negative shocks on the equity risk premium is also examined using threshold and exponential GARCH-M models. We analyse data on the excess returns of the Indonesian and Sri Lankan stock markets from 2004 to 2013, and we find that the impact of the conditional volatility of excess returns on the equity risk premium is not significant in either country. Instead, we find an impact from negative return shocks on the equity risk premium only in Sri Lanka. Therefore, we conclude that investors are not compensated for the conditional volatility of the excess returns in these two markets, while Sri Lankan investors are compensated for the risk of negative shocks.     

Comparing Exchange Market Pressure across Five African Countries

This paper compares the credibility of exchange rate arrangements for the five African countries which are members of the Community of Portuguese Speaking Countries and will be referred to as Afro-Luso. Our working hypothesis is that credibility necessarily implies low mean exchange market pressure (EMP), low EMP conditional volatility and low-severity EMP crises under financial-market integration. In addition, economic fundamentals must account for EMP dynamics. We also seek evidence of a risk–return relationship for mean EMP and of “bad news” (negative shocks) having a greater impact on EMP volatility than “good news” (positive shocks). Using our econometric models, we are able to rank Afro-Luso countries’ conditional volatility in ordinal terms. Our main conclusion is that countries with currency pegs, such as Guinea-Bissau (GB) and Cape Verde (CV), clearly have lower volatility when compared to those with managed floats and are therefore more credible. Moreover, EMP crises episodes under pegs are much less severe. We find that economic fundamentals correctly account for mean EMP in all countries and that the risk–return relationship is much more favourable for investors under currency pegs, as the increase in volatility is lower for the same rate of return. The exception to this finding is Mozambique (MOZ), which apparently has a risk–return profile akin to that enjoyed by countries with pegs. A plausible reason is that MOZ has the only managed float in our sample implementing monetary and exchange rate policy within the confines of an IMF framework, which establishes floors for international reserves and ceilings for the central bank’s net domestic assets. This intuition needs to be tested, however. EMP conditional volatility, meanwhile, is generally driven by changes in domestic credit (lowers it) and foreign reserve changes (raises it). The first effect is more pronounced under currency pegs, but also under MOZ’s managed float. “Bad news” increases volatility more that “good news” only in the case of CV’s currency peg, which we take to be another sign of its credibility. A few striking cross-country comparisons also emerge in our analysis. Among countries with managed floats, Angola (ANG) has the most severe EMP crises, MOZ the least severe and São Tomé &; Príncipe (STP) lies between the two extremes but closer to MOZ.     

The South African–United States sovereign bond spread and its association with macroeconomic fundamentals

The yield spread of South African to United States 10-year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid-1980s. This paper examines the association between the spread and macroeconomic fundamentals over the 1960–2019 sample period, under the GARCH and GARCH-M class of estimators. We find that higher South African economic growth, lower inflation, public and private debt, as well as rand–dollar appreciation are all associated with a statistically significantly lower South African–United States yield spread. The strongest impact is associated with the public debt-to-GDP ratio. Mean spread levels do not appear to be influenced by yield volatility. Finally, while there is no evidence of sign bias in the impact of shocks on yield volatility (negative shock impacts are no different than positive), there is evidence of size bias for both positive and negative shocks: larger shocks have a larger impact on volatility than small, regardless of their sign. Collectively, and even ignoring the impact of private sector leveraging, South Africa’s performance in these macroeconomic fundamentals is associated with an increase in the South African–United States yield spread of 363 basis points (since 2012).     

Great Moderation in the Japanese economy

This paper investigates the contribution of technology and nontechnology shocks to the changing volatility of output and labor growth in the postwar Japanese economy. A time-varying vector autoregression (VAR) with drifting coefficients and stochastic volatilities is modeled and long-run restriction is used to identify technology shocks in line with Galí (1999) and Galí and Gambetti (2009). We find that technology shocks are responsible for significant changes in the output volatility throughout the total sample period while the volatility of labor input is largely attributed to nontechnology shocks. The driving force behind these results is the negative correlation between labor input and productivity, which holds significantly and persistently over the postwar period.     

The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks in the G-7

The changing relationships between the G-7 countries are examined through VAR models for quarterly growth, estimated over sub-periods and using a rolling data window. Trivariate models are employed, each including the US and a European (E15) aggregate. The results show that conditional volatility of growth has declined relatively more since 1980 for E15 than for the US, aggregate European shocks have increased impact on “core” European countries from around 1980, the effects of the US on Europe are largest during the 1970s and the late 1990s, and E15 has a steadily increasing impact on the US economy over time. JEL Classification Numbers: E32, F02, F43     

Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa in the 1995‐2010 Period

This paper attempts to assess the extent of volatility spillovers between the equity market and the foreign exchange market in South Africa. Multistep family of the General Autoregressive Conditional Heteroskedasticity models are used for this end, whereby volatility shocks obtained from the mean equation estimation in each market are included in the conditional volatility of the other market, respectively. The paper selects the appropriate volatility models for each market following criteria such as covariance stationarity, persistence in variance and leverage effects. The finding of the paper indicates that there is a unidirectional relationship in terms of volatility spillovers from the equity market to the foreign exchange market. The paper supports the view that the extent of foreign participation in the South African equity market possibly contributes to this phenomenon.     

Spillovers in Exchange Rates and the Effects of Global Shocks on Emerging Market Currencies

This paper provides an investigation into the spillover effects of exchange rate returns and volatility for developed and emerging market currencies, using data from 1997 to 2011. The results suggest that spillovers in exchange rate returns have increased steadily over time, in moderate reaction to economic events. In contrast, spillovers in total observed volatility (measured by squared returns) react more strongly to economic events, and this transmission has remained at a relatively high level since the global financial crisis. Furthermore, over the course of time, global shocks would appear to account for a larger proportion of aggregate exchange rate volatility (and the relative importance of domestic shocks has declined). The paper also considers whether the increase in volatility spillover is due to sudden shocks, or whether it is due to changes in the stochastic trend of the underlying volatility process. The results suggests that in most cases, this increase is due to sudden shocks, however, in certain instances country‐specific events may perpetuate changes to the trend of the underlying volatility spillover.     

What a network measure can tell us about financial interconnectedness and output volatility

This paper applies the PageRank algorithm, often used in network analysis, to capture multidimensional and high-degree, cross-border banking relations among countries. It provides a nuanced picture of financial interconnectedness that has not been available in the literature to date.Our measure, FIRank, shows the probability of connection to the network by any country or, equivalently, the share of all connections captured by each country, and provides relative rankings of countries according to their degree of interconnectedness. We show that the United Kingdom and the United States remain the ‘core’ in the global banking network over a thirty-three-year period, with most countries scattered in the ‘periphery’ despite considerable growth and change in the network.This finding contrasts with claims of an increasingly even distribution of connections reported in other studies using more limited network measures. Examining whether financial interconnectedness raises or lowers output volatility, we show that the relationship is nonlinear: initially, higher interconnectedness raises volatility, but beyond a critical level volatility is reduced. This is true in periods of smaller and idiosyncratic shocks but is even more pronounced in the GFC period of large shocks. The novelty of our approach lies in applying well-understood network measures to cross-border banking data to identify where countries rank in international financial interconnectedness with the global bank-lending network.Further, by explicitly analysing how the relative interconnectedness index is related to output volatility we provide new insights into the pros and cons of higher levels of international financial interconnection.     

THE CHANGING VOLATILITY OF THE SOUTH AFRICAN ECONOMY

During the last decade economic literature explored the presence of and reasons for what became known as “the great moderation” in the US and other G7 countries. “The great moderation” describes the decrease in economic volatility experienced in many of the G7 countries. This paper finds that in South Africa volatility is also not constant (it even finds that there are autoregressive conditional heteroskedastic effects present) and that volatility also decreased, particularly since 1994. Following the literature, the paper explores several reasons for this decrease and finds that smaller shocks, better monetary policy and improvements in the financial sector that place less liquidity constraints on individuals and allow them to manage their debt better are some of the main reasons for the reduction in the volatility of the South African economy. The literature on the G7 also suggests that better inventory management contributed to the lower volatility. However, this seems not to be true for South Africa.     

Multivariate GARCH Volatility Across Major Industry Groups of the Stock Exchange of Thailand

This paper examines the volatility on the time-series relations among the returns of industry group indices in the stock exchange of Thailand. Does volatility of the return series in one industry group indices necessarily lead to volatility in other industry group indices among the sample of eight industry groups？ This research will be valuable to investors utilizing a better understand diversification needed to get good returns. Daily data （2,116 days） are used in this paper covering data for the nine-year period from January 5, 2004, to August 31, 2012. Multivariate Generalized Autoregressive Conditional Heteroscedasticity was tested consisted of： （1） Diagonal VEC Model; （2） Baba Engle Kraft Kroner Models （BEKK Models）; （3） Vector Autoregressive Moving Average GARCH Model （VARMA GARCH Model）; and （4） Constant Conditional Correlation Model （CCC Model）. The findings indicated that the major result shows that, volatility in one industry group necessarily lead to volatility in other industry group indices in the opposite way and in the similar way.     

Chinese exchange rate and price effects on G3 import prices

This paper explores the degree of price and exchange rate interdependence between China and the G3 (US, Japan and the Euro-zone) by undertaking a VAR based shock analysis. A GARCH framework is also employed to derive the conditional variances to uncover the extent of volatility transmission. We address two key issues. First as there have been concerns about low value-added cheap Chinese goods flooding G3 markets, we attempt to measure the impact of Chinese prices on G3 import prices. Second, we focus on the transmission of exchange rate shocks – a subject which we approach by examining shocks in China's bilateral exchange rate with each of these major trading partners (the US, Japan and the Euro Area). Our results indicate that reduced import prices from China are the channel through which aggregate domestic prices in the G3 remain depressed, while the impact of the RMB exchange rate with G3 currencies appears less powerful. This finding implies that the Chinese authorities’ RMB exchange rate policy is relatively unimportant and, in particular, that a revaluation of the RMB would not do much to reduce the US trade deficit. In terms of volatility spillover, the relatively flexible RMB exchange rate against the Euro results in RMB-EUR volatility having a stronger influence than the more tightly controlled RMB-USD rate on the volatility of Chinese export prices.     

Examining Stock Volatility in the Segmented Chinese Stock Markets: A SWARCH Approach

Abstract

This study adopts the SWARCH model to examine the volatile behavior and volatility linkages among the four major segmented Chinese stock indices. We find strong evidence of a regime shift in the volatility of the four markets, and the SWARCH model appears to outperform standard generalized autoregressive conditional heteroskedasticity (GARCH) family models. The evidence suggests that, compared with the A-share markets, B-share markets stay in a high-volatility state longer and are more volatile and shift more frequently between high- and low-volatility states. In addition, the relative magnitude of the high-volatility compared with that of the low-volatility state in the B-share markets is much greater than the case in the two A-share markets. B-share markets are found to be more sensitive to international shocks, while A-share markets seem immune to international spillovers of volatility. Finally, analyses of the volatility spillover effect among the four stock markets indicate that the A-share markets play a dominant role in volatility in Chinese stock markets.     

Does Economic Policy Uncertainty Predict Exchange Rate Returns and Volatility? Evidence from a Nonparametric Causality-in-Quantiles Test

Recent studies have analysed the ability of measures of uncertainty to predict movements in macroeconomic and financial variables. The objective of this paper is to employ the recently proposed nonparametric causality-in-quantiles test to analyse the predictability of returns and volatility of sixteen U.S. dollar-based exchange rates (for both developed and developing countries) over the monthly period of 1999:01–2012:03, based on information provided by a news-based measure of relative uncertainty, i.e., the differential between domestic and U.S. uncertainties. The causality-in-quantile approach allows us to test for not only causality-in-mean (1st moment), but also causality that may exist in the tails of the joint distribution of the variables. In addition, we are also able to investigate causality-in-variance (volatility spillovers) when causality in the conditional-mean may not exist, yet higher order interdependencies might emerge. We motivate our analysis by employing tests for nonlinearity. These tests detect nonlinearity, as well as the existence of structural breaks in the exchange rate returns, and in its relationship with the EPU differential, implying that the Granger causality tests based on a linear framework is likely to suffer from misspecification. The results of our nonparametric causality-in-quantiles test indicate that for seven exchange rates EPU differentials have a causal impact on the variance of exchange rate returns but not on the returns themselves at all parts of the conditional distribution. We also find that EPU differentials have predictive ability for both exchange rate returns as well as the return variance over the entire conditional distribution for four exchange rates.     

危机冲击与全球贸易波动的经验分析

本文对近二十年来历次危机冲击下全球贸易波动的特征进行经验比较后发现:贸易波动的幅度均高于经济波动幅度,同时贸易收入弹性值有逐步增大的趋势,而危机冲击时期贸易收入弹性值呈现明显的"放大性"并有出现负值的可能。因此,贸易增速历来高于经济增速的事实,很难准确解释危机冲击下的贸易大幅度波动。危机冲击下全球贸易波动特征的演进规律及其内在作用机制,应从国际分工演进和国际贸易自身特点入手,这是值得深入研究的大课题。     

Global commodity prices and global stock market volatility shocks: Effects across countries

We investigate the time-varying dynamics of global stock market volatility, commodity prices, domestic output and consumer prices. We find (i) stock market volatility and commodity price shocks impact each other and the economy in a gradual and endogenous adjustment process, (ii) impact of commodity price shock on global stock market volatility is significant during global financial crises, (iii) effects of global stock market volatility on the US output are amplified by endogenous commodity price responses, (iv) effects of global stock market volatility shocks on the economy are heterogeneous across nations and relatively larger in twelve developed countries, (v) four developing/small economies are more vulnerable to commodity price shocks.     

Volatility and Volume in Chinese Stock Markets

The fact that stock market returns in Europe and the USA are characterised by conditional heteroscedasticity is by now well documented in a large literature. We address the question of whether the same is true of the four Chinese stock markets (Shanghai and Shenzhen A and B) over the period from 25 November 1994 to 27 April 2001. Using daily index data, we make two departures from the standard GARCH(1,1) model. First, we use exponential GARCH (EGARCH) to allow for asymmetry in the volatility, which may be present as a result of leverage effects. Second, we respond to evidence of two-way causality between volume and return (and return volatility) by introducing a simultaneous equation model of the relationship. The results of estimating the model indicate that asymmetry does not seem to be present to a significant degree, possibly as a result of lack of information or concern among Chinese investors. We find that volume appears to play a significant part in determining index volatility, which may reflect information arrival effects or may alternatively result from the direct impact of trading on volatility. At the same time, we also find that both the level of returns and their conditional variance have an impact on trade volume, probably because positive (negative) returns tend to attract (deter) investors into the markets.     

WELFARE GAINS OF AID INDEXATION IN SMALL OPEN ECONOMIES

Foreign-aid flows to poor, aid-dependent economies are highly volatile and pro-cyclical. Shortfalls in aid coincide with shortfalls in GDP and government revenues. This increases the consumption volatility in aid dependent countries, thereby causing substantial welfare losses. This paper finds that indexing aid flows to exogenous shocks, like a change in the terms of trade, can significantly improve the welfare of an aid-dependent country by lowering its output and consumption volatility. Compared to the benchmark specification with stochastic aid flows, indexation of aid flows to terms-of-trade shocks can reduce the cost of business-cycle fluctuations in the recipient country by 4% of permanent consumption. Moreover, use of indexed aid can allow donors to reduce the aid flows by 3% without lowering the level of welfare in the recipient country.