Volatility spillover in the foreign exchange market: the Indian experience

We find evidence of significant volatility co-movements and/or spillover from different financial markets to the forex market in India. Among a large number of variables examined, volatility spillovers from domestic stock, government securities, overnight index swap, Ted spread and international crude oil markets to the foreign exchange market are found to be significant. There is evidence of asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis volatility indicate that the reform measures and changes in financial markets microstructure during the crisis period had significant impact on volatility spillover. During the post-crisis period, the lagged volatility component that represents persistent or fundamental changes had significant spillover effect on forex volatility, rather than the temporary shocks component. There is evidence of a decline in the asymmetric response in the forex volatility during the post-crisis period in India.     

MACROECONOMIC NEWS,STOCK TURNOVER,AND VOLATILITY CLUSTERING IN DAILY STOCK RETURNS

We study volatility clustering in daily stock returns at both the index and firm levels from 1985 to 2000. We find that the relation between today's index return shock and the next period's volatility decreases when important macroeconomic news is released today and increases with the shock in today's stock market turnover. Collectively, our results suggest that volatility clustering tends to be stronger when there is more uncertainty and disperse beliefs about the market's information signal. Our findings also contribute to a better understanding of the joint dynamics of stock returns and trading volume.     

The Impact of Monetary and Fiscal Policy Shocks on Stock Markets: Evidence from China

We study the impact of Chinese monetary and fiscal policy shocks and the interaction of the two policies on stock markets. We find that, first, when we focus on the contemporaneous correlation, Chinese fiscal policy has significant, negative contemporaneous relationships with stock market performance, while monetary policy’s impact on stock market performance varies, depending on the fiscal policy. Second, with respect to the lagged variables, Chinese monetary and fiscal policy both have a significant and direct positive effect on stock market performance. Meanwhile, interaction between the two policies plays an extremely important role in explaining the development of stock markets.     

The impact of monetary policy surprises on asset return volatility: the case of Germany

This paper investigates the impact of monetary policy surprises by the FED or Bundesbank/ECB on the return volatility of German stocks and bonds using a GARCH-M model. We show that stock return volatility is susceptible to monetary policy surprises in the United States, whereas monetary policy surprises in the Euro zone matter for bond return volatility. These findings are robust for other Euro zone stock markets, but not significant for other Euro zone bond markets. The empirical evidence also suggests that monetary policy surprises have larger effects on German stock return volatility in bear markets than in bull phases. Moreover, our results support the claim that stock return volatility can be negatively correlated with stock returns, contradicting predictions made by many asset pricing models (e.g., CAPM or ICAPM) and the empirical finding of an insignificant relationship often reported in the literature.

Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

Causality and cointegration of stock markets among the United States,Japan and the South China Growth Triangle

This paper explores the causality and cointegration relationships among the stock markets of the United States, Japan and the South China Growth Triangle (SCGT) region. Applying the recently advanced unit root and cointegration techniques that allow for structural breaks over the sample period (October 2, 1992 to June 30, 1997), we find that there exists no cointegration among these markets except for that between Shanghai and Shenzhen. By invoking the Granger causality test and considering the non-synchronous trading problem, we will show that stock price changes in the US have more impact on SCGT markets than do those of Japan. More specifically, price changes in the US can be used to predict those of the Hong Kong and Taiwan markets on next day. Similarly, price changes on the Hong Kong stock market lead the Taiwan market by 1 day. Furthermore, the stock returns of the US and Hong Kong markets are found to be contemporaneous. Finally, there is a significant feedback relationship between the Shanghai and the Shenzhen Stock Exchanges.     

The Stochastic Properties of Major Canadian Exchange Rates

This paper extends the results of Akgiray and Booth [2] on the stochastic properties of five major Canadian exchange rates using the EGARCH-M model along with the generalized error distribution (GED). In addition to the issue of first- and second-order dependencies, explored by the authors, the paper (1) addresses the issue of asymmetric volatility, (2) examines the extent to which volatility affects future movements in these exchange rates, (3) measures the amount of kurtosis in the data, and (4) investigates the transmission mechanism of innovations and volatility shocks across the five Canadian exchange rate markets. The five Canadian dollar exchange rates are for the U.S. dollar, the Japanese yen, the British pound, the German mark, and the French franc. Changes in Canadian exchange rates are conditionally heteroskedastic, a finding which is in line with that of Akgiray and Booth [2]. There is no evidence supporting the assertion that volatility triggers such changes. The hypothesis of asymmetric volatility is rejected for all Canadian exchange rates; thus unexpected appreciations and depreciations of the Canadian currency have similar impact on future volatility of these exchange rates. Innovations in the Canadian exchange rate markets for the U.S. dollar, the British pound, and French franc influence the Japanese yen market, while innovations in the markets of the British pound and German mark influence the French franc market. Significant but negative volatility spillovers radiate from the German mark market to the U.S. dollar market and from the French franc market to the German mark market, resulting in lower levels of volatility in both the U.S. and German markets. The distributions of all five series of Canadian exchange rates are highly leptokurtic relative to the normal distribution. The GED distribution provides a good characterization of these distributions.     

Volatility Spillovers of Stock Markets between China and the Countries along the Belt and Road

ABSTRACT

This article intensively studies the stock market volatility spillover effects between China and the countries along the Belt and Road (B&R) based on the covered selection of Morgan Stanley Capital International Inc (MSCI) index by using multiplicative error model to measure stock market volatility with daily price range. The results show that during the whole sample period, there are bilateral linkages of volatility between the stock markets of China and all of B&R countries. Most of B&R and China’s markets are sensitive to positive news but the asymmetry is trivial. Financial crisis intensified the volatility spillover effects across countries while the markets’ volatilities tend to be influenced by the negative shocks from foreign markets. The B&R markets as risk absorbers exhibit significant sensitivities to the negative news from Chinese market during the crisis period.     

Exchange return co-movements and volatility spillovers before and after the introduction of euro

This paper examines return co-movements and volatility spillovers between major exchange rates before and after the introduction of euro. Dynamic correlations and VAR-based spillover index results suggest significant return co-movements and volatility spillovers, however, their extend is, on average, lower in the post-euro period. Co-movements and spillovers are positively associated with extreme episodes and US dollar appreciations. The euro (Deutsche mark) is the dominant net transmitter of volatility, while the British pound the dominant net receiver of volatility in both periods. Nevertheless, cross-market volatility spillovers are bidirectional, and the highest spillovers occur between European markets.     

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.     

A behavioural explanation to the asymmetric volatility phenomenon: Evidence from market volatility index

This study examines how the behavioural explanations, in particular loss aversion, can be used to explain the asymmetric volatility phenomenon by investigating the relationship between stock market returns and changes in investor perceptions of risk measured by the volatility index. We study the behaviour of India volatility index vis‐à‐vis Hong Kong, Australia and UK volatility index, and provide a comprehensive comparative analysis. Using Bai‐Perron test, we identify structural breaks and volatility regimes in the time series of volatility index, and investigate the volatility index‐return relation during high, medium and low volatility periods. Regardless of volatility regimes, we find that volatility index moves in opposite direction in response to stock index returns, and contemporaneous return is the most dominating across the four markets. The negative relation is strongest for UK followed by Australia, Hong Kong and India. Second, volatility index reacts significantly different to positive and negative returns; negative return has higher impact on changes in volatility index than positive return across the markets over full‐sample and sub‐sample periods. The asymmetric effect is stronger in low volatility regime than in high and medium volatility periods for all the markets except UK. The strength of asymmetric effect is strongest for Hong Kong and weakest for India. Finally, negative returns have exponentially increasing effect and positive returns have exponentially decreasing effect on the changes in volatility index.     

The reaction of international stock markets to Federal Reserve policy

This paper investigates how changes in Federal Reserve policy impact international stock returns, with the three objectives of measuring the reaction of international stock markets, understanding the transmission channels of that reaction, and explaining the economic sources of that reaction. We find that unanticipated Federal Reserve policy actions exert a significant and robust influence on international stock prices. However, the influence of unanticipated monetary policy actions is not strong enough to change the correlation structure of international equity returns. We also find that international stock return co-movements play an important role in the transmission of monetary policy. Finally, the variance decomposition analysis indicates that the effects of monetary policy surprises on future excess returns or dividend returns account for the largest portion of the equity price response.     

The asymmetric relationship between returns and implied volatility: Evidence from global stock markets

We investigate the asymmetric relationship between returns and implied volatility for 20 developed and emerging international markets. In particular we examine how the sign and size of return innovations affect the expectations of daily changes in volatility. Our empirical findings indicate that the conditional contemporaneous return-volatility relationship varies not only based on the sign of the expected returns but also upon their magnitude, according to recent results from the behavioral finance literature. We find evidence of an asymmetric and reverse return-volatility relationship in many advanced, Asian, Latin-American, European and South African markets. We show that the US market displays the highest reaction to price falls, Asian markets present the lowest sensitivity to volatility expectations, while the Euro area is characterized by a homogeneous response both in terms of direction and impact. These results may be safely attributed to cultural and societal characteristics. An extensive quantile regression analysis demonstrates that the detected asymmetric pattern varies particularly across the extreme distribution tails i.e., in the highest/lowest quantile ranges. Indeed, the classical feedback and leverage hypotheses appear not plausible, whilst behavioral theories emerge as the new paradigm in real-world applications.     

Financial crises,price discovery,and information transmission: a high-frequency perspective

This paper examines the price discovery processes before and during the 2007–2009 subprime and financial crisis, as well as the subsequent European sovereign crisis, for American and German stock and bond markets, as well as for U.S. Dollar/Euro FX. Based on 5-s intervals, we analyze how asset prices interact conditional on macroeconomic announcements from the USA and Germany. Our results show significant co-movement and spillover effects in returns and volatility, reflecting systematic information transmission mechanisms among asset markets. We document strong state dependence with a substantial increase in inter-asset spillovers and feedback effects during times of crisis.     

European stock market integration: Fact or fiction?

The objective of this study is to determine the dynamics and contemporaneous interactions of Euro stock markets at the country and economic sector level. Overall test results have revealed the time-varying nature of the financial market integration process. Promoted by the anticipation and subsequently the formation of the currency union Euro stock markets became more integrated between 1998 and 2006. Monetary policy convergence, however, may have facilitated the divergence of economic variables. Evidence is found that return behavior is changing and stock markets within the Euro zone are starting to drift apart.     

Effects of investor sentiment and country governance on unexpected conditional volatility during the COVID-19 pandemic: Evidence from global stock markets

This paper first investigates the relationship between investor sentiment, captured by internet search behaviour, and the unexpected component of stock market volatility during the COVID-19 pandemic. According to data on 12 major stock markets, our research indicates a positive correlation between the Google search volume index on COVID-19 and the unexpected volatility of stock markets. The result suggests that greater COVID-19-related investor sentiment during this pandemic is associated with higher stock market uncertainty.Our study further examines whether country-level governance plays a role in protecting stock markets during this pandemic and reveals that the unexpected conditional volatility is lower when a country's governance is more effective. The impact of investor sentiment and country governance on unexpected volatility after the initial shock of COVID-19 is also investigated. The findings demonstrate the importance of establishing good country-level governance that can effectively reduce stock market uncertainty in the context of this pandemic, and support continual policy development related to investor protection.     

Asymmetric volatility spillover between oil-importing and oil-exporting countries' economic policy uncertainty and China's energy sector

While the relationship between economic policy uncertainty(EPU) and energy market is of great interest to economist, previous research dose not differentiate the effect from oil-importing countries to oil-exporting countries' EPU on the a country's energy sector. In this paper, we address this issue by testing the effect of importer and exporter's EPU on the largest oil-importing country, China, as oil-importing affected greatly by the economic policy. TVP-FAVAR model is applied to obtain the factors and time-varying coefficients of 21 countries' EPU monthly indexes and energy stock realized volatility. We find that the Chinese energy sector's stock volatility is positively related to EPU shocks and that bad volatility has a stronger impact than good volatility. Second, the volatility spillover from oil-exporting countries' EPU on the Chinese energy sector is stronger than that from oil-importing countries' EPU, with a stronger effect for bad volatility than for good volatility. Finally, The bad volatility spillover and spillover asymmetry is stronger during the crisis periods, such as the debt crisis, energy contention, oil price turbulence, or limited production agreement, both symmetric and asymmetric spillovers increase. Our findings have potentially important implications for the regulators and investors on Chinese oil market with different types of countries' EPU.     

Stock markets’ bubbles burst and volatility spillovers in agricultural commodity markets

Our paper focuses on commodity financialization and the gradual integration between commodity and financial markets, investigating to what extent shocks in stock markets impact commodity price volatility, and the persistency of the phenomenon. To this end, we estimate Volatility Impulse Response Function from stock markets to agricultural commodity markets over a symmetric window before and after two of the most important bubble bursts since the new millennium, the 2000 dot.com bubble and the 2008 financial crises. Results highlight that volatility spillover increased significantly after the 2008 financial crises, signalling a rising interconnection between financial and agricultural commodity markets.     

Oil Price and Stock Market Synchronization in Gulf Cooperation Council Countries

Knowing that the Gulf Cooperation Council (GCC) economies are dichotomous in nature, and growth in the non-oil sector is tributary to the oil sector, we document the extent of synchronization between crude oil prices and stock markets for each of the GCC markets and for the GCC as an economic bloc. We use both the bivariate and multivariate nonparametric synchronicity measures proposed by Mink et al. (2007) to assess that linkage. We find a low to mild (mild to strong) degree of synchronization between oil price and stock market returns (volatilities). In a very few instances, we find very strong (above 80 percent) associations between these variables. These results hold irrespective of whether we assume that stock market participants form adaptive or rational expectations about the price of oil. Dynamic factor results confirm that shocks to volatility are more important than shocks to oil price returns for the GCC stock markets.     

Transmission of shocks from cross-listed markets to the return and volatility of domestic stocks

This paper examines the transmission of information from German and the U.S. markets to domestic markets using daily price and volume data of 264 stocks from 26 countries that are traded in their home country and cross-listed outside their home market as depository receipts (DRs); in the German market as Global Depository Receipts (GDRs) and in the U.S. as American Depository Receipts (ADRs). We identify days with significant news arrivals in a market through minimum thresholds for both significant absolute price change and trading volume. DR returns and volatilities are affected by the shocks in the markets where they are cross-listed controlling for domestic shocks. Contemporaneous and/or lagged shocks to the cross-listed markets are transmitted to domestic stock returns and volatilities. South American DRs are affected mostly by U.S. shocks, while Eastern European DRs show greater reaction to the German shocks.