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.     

The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand

This paper studies the dynamics of price discovery for markets with bilateral cross-listings. Using a sample of four Australian stocks cross-listed in New Zealand and five New Zealand stocks cross-listed in Australia for the period January 2002 to December 2007, we assess Hasbrouck (1995) information shares and Grammig et al. (2005) conditional information shares over time. We observe that in both cases the home market is dominant in terms of price discovery. However, when studying price discovery over time, we find that the importance of the Australian market (the larger of the two markets) is increasing for both Australian and New Zealand domiciled firms. Finally, using panel regression analysis, we find that the growth in the importance of the Australian market is positively related to the growth in the size of the firm and negatively related to the size of the percentage spread in the Australian market, implying that as firms grow larger and their cost of trading in Australia declines, the Australian market becomes more informative.     

Foreign Shocks on Chilean Financial Markets: Spillovers and Comovements Between Bond and Equity Markets

Abstract:

The domestic impact of external shocks will depend on the degree of coupling of domestic assets to foreign markets, but also on the spillovers among assets. The covariance between different types of assets could be affected by new information. Changes in the covariance, for example, could come from a stronger rebalancing between stocks and bonds. Therefore, we will analyze four different assets-government bonds, corporate bonds, money market instruments, and equities-and study the conditional correlation between them. We find that the corporate bond market tends to increase coupling in turbulent times, while the money market decreases coupling. We propose to test international spillovers taking into account a methodology for estimating the conditional mean, variance, and covariance on domestic bond and equity markets, while considering that shocks may have asymmetric effects depending on whether the news is good or bad.     

International stock markets interactions and conditional correlations

This paper investigates the transmission of price and volatility spillovers across the US and European stock markets in bivariate combinations. The framework used encompasses the most popular multivariate GARCH models, with News Impact Surfaces employed for interpretation. By using synchronous data the dynamic conditional correlation model (Engle, R., 2002. Dynamic conditional correlation: a simple class of multivariate GARCH models. Journal of Business and Economic Statistics 20, 339–350) is found to best capture the relationships for over half of the bivariate combinations of markets. Other findings include volatility spillovers from the US to European markets, and a reverse spillover. In addition, the magnitude of the correlation between markets is higher not only for negative shocks in both markets, but also when a combination of shocks of opposite signs occurs.     

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.     

Intra- and inter-regional spillovers between emerging capital markets around the world

In this paper, returns and volatility spillovers between emerging capital markets of Central and Eastern Europe, Latin America, and South-East Asia are investigated. We distinguish between spillovers from countries located in one region (intra-regional) and in different regions (inter-regional) after controlling for shocks originating at home and on the global market. Both intra- and inter-regional spillovers are significant, with the former being more pronounced than the latter. Our findings indicate that linkages between emerging markets are not solely due to their common dependence on the global capital market and highlight the importance of common factors in intra-regional interdependencies.     

Price leadership and asynchronous movements of multi-market listed stocks

We examine the asynchronous price movements of the same assets traded on multiple markets, each of which has its unique characteristics. Differently from the existing literature, we use a dynamic structural Vector Autoregressive (VAR) setting to explore the effects of market-wide and idiosyncratic shocks on both home and host listings. We find strong evidence that foreign prices lead home prices, but not the reverse effect. Contrary to theory predictions, investors in the firms’ home market respond to idiosyncratic fluctuations in the stock returns in the host markets. Our results suggest that investors pay attention to fluctuations in the stocks listed on the more institutionally developed markets.     

Firm size and volatility analysis in the Spanish stock market

Using Spanish stock market data, this paper examines volatility spillovers between large and small firms and their impact on expected returns. By using a conditional capital asset pricing model (CAPM) with an asymmetric multivariate GARCH-M covariance structure, it is shown that there exist bidirectional volatility spillovers between both types of companies, especially after bad news. After estimating the model, a positive and significant price of risk is obtained. This result is consistent with the volatility feedback effect, one of the most popular explanations of the asymmetric volatility phenomenon, and explains why risk premiums are much more sensitive to negative return shocks coming from the whole market or other related markets.     

Price discovery of cross-listed firms

This paper examines the contribution of cross-listing to price discovery for a unique and comprehensive sample of firms listed abroad. Using an extended measure of the common factor weight, we find that foreign market contribution to price discovery is more important for multiple-listed firms compared to cross-listed ones. Our results also show that US exchanges are more conductive to price discovery than do foreign European markets. On a univariate regression, we find new evidence that order driven markets and those which are more integrated with the world contribute significantly to price discovery of stocks listed abroad. On a multivariate regression, information asymmetry measures seem to have the most important effect on foreign market contribution to price determination.     

Price Discovery for Segmented US-Listed Chinese Stocks: Location or Market Quality?

Abstract:  This study extends the cross-listing literature by examining how, and to what extent, the trading of cross-listed China-backed ADRs on the New York Stock Exchange contributes to information flows and price discovery for the corresponding stocks traded in China's A-share market. We find that the cross-listed US prices and Chinese prices are not cointegrated in the long-run and the home market plays a far more important role in both price discovery and volatility spillover than does the US market. The home bias hypothesis still holds for the segmented Chinese A-share market and the location where price discovery actually originates is the essential factor in the process of international information transmission.     

A Conditional Assessment of the Relationships between the Major World Bond Markets

This paper uses a bivariate GARCH framework to examine the lead‐lag relations and the conditional correlations between 10‐year US government bond returns and their counterparts from the UK, Germany, and Japan. We find that while mean and volatility spillovers exist between the major international bond markets, they are much weaker than those between equity markets. The results also indicate that the correlations between the US and other major bond market returns are time varying and are driven by changing macroeconomic and market conditions. However, in contrast to the finding that the benefits of international diversification in equity markets evaporate during high‐stress periods, we find that the benefits of diversification across major government bond markets do not decrease during periods of extremely high bond market volatility or following extremely negative US and foreign bond returns.     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.     

Asymmetric volatility spillovers between economic policy uncertainty and stock markets: Evidence from China

This study explores the spillovers between economic policy uncertainty (EPU) and stock market realized volatility (RV). The monthly index of Chinese and US EPU and RV are used to analyze the pairwise directional spillovers. We find that RV is a net receiver that is more vulnerable to shocks from U.S. EPU than to shocks from Chinese EPU. We further decompose the RV into good and bad volatility to test the asymmetric spillover effect between the stock market and EPU. The results suggest that EPU has a bigger effect on bad volatility in the stock market throughout most of the sample period. However, we find that good volatility spillovers become larger during periods of stimulated reform, whereas bad volatility spillovers become larger during periods of international disputes. We show that Chinese stock market volatility is sensitive to both U.S. and Chinese EPU and that the spillover is asymmetric in different periods.     

Spatial linkage of volatility spillovers and its explanation across G20 stock markets: A network framework

This paper empirically estimates the spatial correlation relationship of volatility spillovers and its influencing factors across G20 stock market. We apply GARCH-BEKK model to estimate volatility spillover and construct dynamic volatility networks. The connectedness analysis shows that the spatial linkage of volatility spillover is time varying and has obvious multiple superposition phenomena. As somewhat innovation results, we use the factor analysis method to obtain centrality comprehensive indicators that can clearly depict the risk contagion intensity and risk acceptance intensity. In general, the developed markets are more influential than the emerging markets during periods of turbulence, and the emerging markets are more sensitive to volatility shocks than developed markets during any period. Finally, this paper introduces quadratic assignment procedure (QAP) method to identify the major factors that influence the spatial linkage of volatility spillovers. Results show that geography influences the volatility spatial correlation differently across economic cycles, and the centrality structure factors have greater impact on the spatial correlation than the external economic factors. The QAP regression analysis shows that these influencing factors can explain about 50% of the spatial correlation variation of international financial markets' volatility spillovers.     

Return and volatility co-movement in commodity futures markets: the effects of liquidity risk

Commodity markets are a widely researched topic in the field of finance. In this paper, we investigate the co-movement of return and volatility measures in different commodity futures markets and how these measures are affected by liquidity risk. First, we find that commodity returns display co-movement and that liquidity risk plays a key role in shaping asset return patterns. Moreover, we show that the volatilities of commodity returns co-move, and we demonstrate the role of liquidity risk in this joint pattern. We also find that the commodity markets we investigated share a common volatility factor that determines their joint volatility co-movement. Because liquidity risk affects both commodity returns and volatility shocks, it might be interpreted as the common causal factor driving both measures simultaneously. Therefore, we affirm the view that liquidity shocks are firmly related to two residual risks originating from both market return and market volatility. Finally, we also show that liquidity spillovers can significantly drive cross-sectional correlation dynamics.     

Volatility spillovers and dynamic correlation in European bond markets

This paper examines the dynamic linkages among the European bond markets. We model the price and volatility spillovers from the US bond market and the aggregate Euro area bond market to twelve individual European bond markets using an EGARCH model that allows for a dynamic correlation structure. Our results suggest that significant volatility spillovers exist from both the aggregate Euro area bond market and the US bond market to the individual European markets. Moreover, the introduction of the Euro has strengthened the volatility spillover effects and the cross-correlations for most European bond markets.     

MEAN AND VOLATILITY SPILLOVERS ACROSS MAJOR NATIONAL STOCK MARKETS: FURTHER EMPIRICAL EVIDENCE

This paper provides additional insight into the nature and degree of interdependence of stock markets of the United States, Japan, the United Kingdom, Canada, and Germany, and it reports the extent to which volatility in these markets influences expected returns. The analysis uses the multivariate GARCH-M model. Although they are considered weak, statistically significant mean spillovers radiate from stock markets of the U.S. to the U.K., Canada, and Germany, and then from the stock markets of Japan to Germany. No relation is found between conditional market volatility and expected returns. Strong time-varying conditional volatility exists in the return series of all markets. The own-volatility spillovers in the U.K. and Canadian markets are insignificant, supporting the view that conditional volatility of returns in these markets is “imported” from abroad, specifically from the U.S. Significant volatility spillovers radiate from the U.S. stock market to all four stock markets, from the U.K. stock market to the Canadian stock market, and from the German stock market to the Japanese stock market. The results are robust and no changes occur in the correlation structure of returns over time.     

Volatility spillovers and the effect of news announcements

We examine the effect of US and European news announcements on the spillover of volatility across US and European stock markets. Using synchronously observed international implied volatility indices at a daily frequency, we find significant spillovers of implied volatility between US and European markets as well as within European markets. We observe a stark contrast in the effect of scheduled versus unscheduled news releases. Scheduled (unscheduled) news releases resolve (create) information uncertainty, leading to a decrease (increase) in implied volatility. Nevertheless, news announcements do not fully explain the volatility spillovers, although they do affect the magnitude of volatility spillovers. Our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets.     

Impact of futures on comovements for UK cross-listed equities

This paper uses La Porta et al.'s [La Porta, R., De Silanes, F.L., Shleifer, A., Vishny, R.W., 1998. Law and finance. Journal of Political Economy 106 (6), 1113–1155] capital markets regulatory classification to analyse the impact of information contained in various futures contracts on the magnitude and persistence of volatility spillovers between markets. The focus here is to examine the impact of futures contracts on comovement between markets. We examine the behavior of foreign cross-listed shares that have listed in different regulatory environments. In particular, the paper analyses spillover effects between foreign cross-listings in tougher, similar and more lax regulatory environments with respect to the relevant domestic indices (FTSE100) and also with the home portfolios of cross-listed equities in the UK. We find that futures variables have a significant impact on the magnitude and persistence of volatility spillovers between markets.     

Determinants of returns and volatility of Chinese ADRs at NYSE

This paper examines the determinants of returns and of volatility of the Chinese ADRs as listed at NYSE. Using an autoregressive conditional heteroskedasticity (ARCH) model and data from 16 April 1998 through 30 September 2004, we find that Hong Kong stock market (underlying market), US stock market (host market), and local (Shanghai A and B) markets all are important determinants of returns of the Chinese ADRs. However, the underlying Hong Kong market has the most significant impact on mean returns of the ADRs. In terms of the determinants of the conditional volatility of the ADRs returns, only shocks to the underlying markets are significant. These results are consistent with [Kim, M., Szakmary, A.C., Mathur, I., 2000. Price transmission dynamics between ADRs and their underlying foreign securities. Journal of Banking and Finance 24, 1359–1382] who find that the most influential factor in pricing the ADRs in Japan, UK, Sweden, The Netherlands and Australia is their underlying shares. Implications of the results for investors are discussed.