The impact of VIX on China’s financial market: A new perspective based on high-dimensional and time-varying methods

Based on the new perspective of high-dimensional and time-varying methods, this paper analyzes the contagion effects of US financial market volatility on China’s nine financial sub-markets. The results show evidence of non-linear Granger causality from the US financial volatility (VIX) to the China’s financial markets. Increased US financial volatility has a negative next-day impact on the stock, bond, fund, interest rate, foreign exchange, industrial product and agricultural product markets, and a positive next-day impact on the gold and real estate markets. US financial volatility has the greatest impact on industrial product market, following by stock, agricultural product, fund, real estate, bond, gold, foreign exchange, and interest rates. Major risk events such as the global financial crisis can cause an enhanced contagion effect of US financial volatility to China's financial markets. This paper supports the achievements of China's actions to prevent and resolve major financial risks in the period of the COVID-19 epidemic.     

Volatility contagion: A range-based volatility approach

This article proposes a new approach to evaluate volatility contagion in financial markets. A time-varying logarithmic conditional autoregressive range model with the lognormal distribution (TVLCARR) is proposed to capture the possible smooth transition in the range process. Additionally, a smooth transition copula function is employed to detect the volatility contagion between financial markets. The approach proposed is applied to the stock markets of the G7 countries to investigate the volatility contagion due to the subprime mortgage crisis. Empirical evidence shows that volatility is contagious from the US market to several markets examined.     

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.     

Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies

The global financial crisis (2007–2009) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects in both advanced and emerging equity markets. In the aggregate equity market indices, contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, in the financial sector indices we find less evidence of contagion than in the aggregate indices, and this is particularly the case for the advanced markets. The results suggest that contagion effects are not strongly related to high levels of global integration.     

COVID-19 and asymmetric volatility spillovers across global stock markets

In this study, I improve the assessment of asymmetry in volatility spillovers, and define six asymmetric spillover indexes. Employing Diebold-Yilmaz spillover index, network analysis, and my developed asymmetric spillover index, this study investigates the time-varying volatility spillovers and asymmetry in spillovers across stock markets of the U.S., Japan, Germany, the U.K., France, Italy, Canada, China, India, and Brazil based on high-frequency data from June 1, 2009, to August 28, 2020. I find that the global markets are well connected, and volatility spillovers across global stock markets are time-varying, crisis-sensitive, and asymmetric. Developed markets are the main risk transmitters, and emerging markets are the main risk receivers. Downside risk dominates financial contagion effects, and a great deal of downside risk spilled over from stock markets of risk transmitters into the global markets. Moreover, during the coronavirus recession, the total degree of volatility spillover is staying at an extremely high level, and emerging markets are the main risk receivers in the 2020 stock markets crash.     

Testing for financial spillovers in calm and turbulent periods

In this paper, we investigate financial spillovers between stock markets during calm and turbulent periods. We explicitly define financial spillovers and financial contagion in accordance with the literature and construct statistical models corresponding to these definitions in a Markov switching framework. Applying the new testing methodology based on transition matrices, we find that spillovers from the US stock market to the UK, Japanese and German markets are more frequent when the latter markets are in a crisis regime. However, we reject the hypothesis of strong financial contagion from the US to the other markets.     

What drives herding in oil-rich,developing stock markets? Relative roles of own volatility and global factors

The main goal of this paper is to formally establish the volatility-herding link in the developing stock markets of the oil-rich GCC countries by examining how market volatility affects herd behavior after controlling for global factors. Using a regime-switching, smooth transition regression model (STR), we find significant evidence of herding in all Gulf Arab stock markets, with the market volatility being the more paramount factor governing the switches between the extreme states of non-herding and herding. The global variables comprised of the U.S. stock market performance, the price of oil and the US interest rate as well as the risk indexes including the CBOE Volatility Index (VIX) and the St. Louis Fed's Financial Stress Index (FSI) are found to be significant factors governing the transition to herding states. The findings stress the effect of contagion in financial markets, despite the restrictions established by the GCC policymakers in order to protect their markets.     

Geopolitical risks and stock market dynamics of the BRICS

This paper examines the effect of geopolitical uncertainty on return and volatility dynamics in the BRICS stock markets via nonparametric causality-in-quantiles tests. The effect of geopolitical risks (GPRs) is found to be heterogeneous across the BRICS stock markets, suggesting that news regarding geopolitical tensions do not affect return dynamics in these markets in a uniform way. GPRs are generally found to impact stock market volatility measures rather than returns, and often at return quantiles below the median, indicating the role of GPRs as a driver of bad volatility in these markets. While Russia bears the greatest risk exposure to GPRs in terms of both return and volatility, India is found to be the most resilient BRICS nation in the group. Noting that geopolitical shocks and in particular terrorist incidents are largely unanticipated, our findings underscore the importance of a strong financial sector that can help return the market to stability and an open economy that allows local investors to diversify country-specific risks in their portfolios.     

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.     

Country risk and stock market volatility,predictability, and diversification in the Middle East and Africa

With globalization, an understanding of country risk (political risk (PR), financial risk (FR), and economic risk (ER)) and its impact on stock market return volatility and predictability is important for evaluating direct investment and country selection decisions in globally and regionally diversified portfolios. This paper examines these issues in the context of the Middle East and Africa (MEAF) and analyzes 10 stock markets in the region over the period 1984–1999. After examining volatility and predictability, this paper explains how portfolios of stocks can be formed from these countries in order to achieve mean–variance efficient portfolios. This paper generally finds that country political, financial and economic risks significantly determine stock volatility and predictability. The diversification exercise shows that an international investor can still benefit by diversifying into the stock markets of Middle East and African countries.     

Common shocks,common transmission mechanisms and time-varying connectedness among Dow Jones Islamic stock market indices and global risk factors

The purpose of this paper is twofold. First, we examine the importance of permanent versus transitory shocks as well as their domestic and foreign components in explaining the business cycle fluctuations of seven Dow Jones Islamic stock markets (DJIM), namely U.S., U.K., Canada, Europe, Asia-Pacific, Japan and GCC, over the period from April 2003 to November 2018, using the permanent-transitory (P-T) decompositions approach of Centoni et al. (2007). Second, we investigate the spillover mechanisms of these shocks across Islamic stock markets and a set of global risk factors, using the Diebold and Yilmaz (DY) (2012) approach. The P-T decomposition results show that the DJIM U.S., U.K., Europe and GCC indices are sensitive to both domestic and foreign shocks, while the DJIM Canada, Japan and Asia-Pacific are most sensitive to domestic shocks. The empirical results of the DY approach indicate that: (i) the return and volatility spillover intensity increase during financial turmoil, supporting evidence of the contagion phenomenon, (ii) the DJIM U.S. is the main transmitter of return and volatility spillovers, while the DJIM GCC is identified as the main receiver of both return and volatility spillovers, (iii) the seven Dow Jones Islamic stock indices are weakly linked to movements of global risk factors, and (iv) there is evidence of possible portfolio diversification between the selected Islamic stock markets and the oil commodity market.     

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.     

我国金融市场间溢出效应研究——基于四元VAR-GARCH(1,1)-BEKK模型的分析

汇率改革以来,政府实施了一系列金融市场改革,促使金融市场一体化程度显著提高,增强了金融市场间联系。本文采用四元VAR(6)-GARCH(1,1)-BEKK模型分析了我国主要金融市场(股票市场、债券市场、外汇市场以及货币市场)的溢出关系。研究发现,上述市场有很强的波动集聚性和持续性,大多数金融市场间存在显著的双向均值溢出,所有市场间均存在显著的双向波动溢出,还发现市场间溢出可能主要来自于市场传染效应。据此,本文认为政府应该采取合理有效的监管框架,监控金融市场参与者的资本金状况,防止金融市场大幅波动,降低风险累积程度,并在执行货币政策时,兼顾金融市场价格变化对货币政策执行效力的影响。     

Multiscale financial risk contagion between international stock markets: Evidence from EMD-Copula-CoVaR analysis

Considering the frequency domain and nonlinear characteristics of financial risks, we measure the multiscale financial risk contagion by constructing EMD-Copula-CoVaR models. Using a sample composed of nine international stock markets from January 4, 1999, to May 13, 2021, the empirical study reveals that: (1) EMD-Copula-CoVaR models can effectively measure the multiscale financial risk contagion, and the financial risk contagion is significant at all time scales; (2) The high-frequency component is the major contributor of financial risk contagion; meanwhile, the low-frequency component is the smallest among all time scale components; (3) The risk export of the US financial market to other markets, except the UK under the original and medium-frequency component, is higher than that it receives; and (4) Even though the magnitude of overall financial risk contagion is similar for the COVID-19 pandemic, Subprime Crises, 9/11 terrorist attack and other crises, the relative importance of different frequency components is heterogeneous. Therefore, the countermeasures of risk contagion should be designed according to its multiscale characteristics.     

Sovereign rating changes—Do they provide new information for stock markets?

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995–2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses – both return and volatility – are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors’ asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.     

Financial contagion vulnerability and resistance: A comparison of European stock markets

This paper investigates contagion to European stock markets associated with seven big financial shocks between 1997 and 2002. We apply methods using heteroscedasticity-adjusted correlation coefficients to discriminate between contagion, interdependence and breaks in stock markets relationships. The analysis focuses on a comparison between developed Western European markets and emerging stock markets in Central and Eastern Europe. We find modest evidence of significant instabilities in cross-market linkages after the crises. The Central and Eastern European stock markets are not more vulnerable to contagion than Western European markets.     

欧债危机冲击我国股票与债券市场的风险传染研究？

欧债危机对金融市场产生了显著的冲击,引发了巨大的风险。本文通过构建二元GARCH-BEKK模型,实证检验了欧债危机背景下欧洲股票市场、我国股票市场、国债市场与企业债市场之间的波动溢出效应,揭示了欧债危机冲击我国股票市场、国债市场与企业债市场的风险传染路径。实证表明,欧债危机冲击我国股票市场与债券市场的风险传导路径为：欧债危机引发的风险通过欧洲股票市场传导到我国股票市场,然后传导到企业债市场,最后传导到国债市场。     

价格波动性与股票预期回报——基于中国市场的初步证据

基于国际资本市场数据的研究发现,股票价格的波动率和股票未来的回报率负相关,而且风险差异不能解释这个现象,文章使用中国股票市场的数据发现了相同的结论。在1998年1月到2003年12月期间内,基于过去一个月内股价波动率的对冲组合在未来六个月内能够取得0.32%的月风险调整超额回报率。M iller(1977)认为股价波动性代表了投资者对股票价值评估的不确定性和异质性,因为卖空限制的存在,波动性高的股票的价格更多地反映了乐观投资者的看法,因而出现高估价值的错误定价。文章分析认为M iller的错误定价理论能够解释股价波动率与未来回报率之间的负相关关系。     

Modelling contagion of financial crises

Inspired by the empirical findings, we include international traders to capture linkage between markets and propose a two-market heterogeneous agents model to simulate financial crisis with contagion effect. This paper manages to calibrate sudden crash behavior of US and UK stock markets during “Black Monday” of 1987 besides smooth crisis and disturbing crisis categorized in literature. It is implied that financial crisis and its contagion could be endogenous, which supports a scenario of over-valuation causing a financial crisis. In addition, the model shows that financial system could be fragile in which small shock(s) hitting individual market’s fundamental could cause financial crisis spreading to the other market. This also supports a scenario of external shock triggering a financial crisis. Lastly, to demonstrate the relevance of our model to financial markets, we manage to match typical stylized facts, especially cross-correlation which is exclusive to a multiple-market case.     

Return and volatility spillovers across the Western and MENA countries

We use weekly data on returns and range-based volatility over 2005–2017 to examine the degree of interconnectedness in financial markets of eleven MENA and four Western economies using the methodology proposed by Diebold and Yilmaz (2009, 2012, 2014). Our findings suggest (a) similar patterns of dynamic spillovers in both returns and in volatility. Both return and volatility spillover indices experienced significant bursts from 2008 to 2011 coinciding with the U.S. financial crisis. (b) Financial markets of Israel, Saudi Arabia and the UAE are more closely integrated with Westerns markets and may serve as primary channels for transmission of Western shocks to the region. Also, shocks to these three markets have noticeable impacts on other MENA markets. (c) Shocks to the U.S. financial markets play a critical role in return and volatility of MENA markets. (d) These findings are robust to alterations in window size and forecast horizon.