Stock market volatility spillovers and portfolio hedging: BRICS and the financial crisis

The paper investigates the dynamic risk–return properties of the BRICS (Brazil, Russia, India, China, South Africa) capital markets and models potential time-varying correlations and volatility spillover effects with the US stock market. A VAR(1)–GARCH(1,1) framework contributes useful insight into US–BRICS market interactions and expands on a thin past empirical literature. A disaggregated approach pays attention to critical US–BRICS business sectors, namely the industrial and financial sectors. Significant return and volatility transmission dynamics are identified between the US and BRICS stock markets and business sectors. This is a critical input that can affect efficient global portfolio diversification and risk management strategies. Based on this empirical evidence, the study proceeds to assess effective portfolio hedge ratios and to construct optimal portfolio weights for diversified asset allocation to US–BRICS markets and business sectors.     

Black swan events and safe havens: The role of gold in globally integrated emerging markets

There is evidence to suggest that gold acts as both a hedge and a safe haven for equity markets over recent years, and particularly during crises periods. Our work extends the recent literature on hedging and diversification roles of gold by analyzing its interaction with the stock markets of the leading emerging economies, the BRICS. While they generally exhibit a high growth rate, these economies still experience a pronounced vulnerability to external shocks, particularly to commodity price fluctuations. Using a multi-scale wavelet approach and a GARCH-based copula methodology, we mainly show evidence of: (i) the time-scale co-evolvement patterns between BRICS stock markets and gold market, with some profound regions of concentrated extreme variations; and (ii) a strong time-varying asymmetric dependence structure between those markets. These findings are essential for risk diversification and portfolio hedging strategies among the investigated markets.     

Dynamic volatility spillovers and investment strategies between the Chinese stock market and commodity markets

Building on the increased interest in the volatility spillover effects between Chinese stock market and commodity markets, this paper investigates the dynamic volatility spillovers of Chinese stock market and Chinese commodity markets based on the volatility spillover index under the framework of TVP-VAR. The result shows that there is a highly dependent relationship between the stock market and commodity markets. On average, the Chinese stock market is the net recipient of spillover, non-ferrous metals and chemical industry have a very obvious spillover impact on the stock market. The degree of total volatility spillover is different in different periods. After major crisis events, the volatility correlation between markets increases. Since the outbreak of COVID-19, the spillover effect of the stock market on the commodity market has been significantly enhanced. Then optimal portfolio weights and hedge ratios are calculated for portfolio diversification and risk management. The result shows that the ability of most commodities to hedge against risks is significantly reduced when the crisis occurs; NMFI (precious metals) and CRFI (grain) still have good hedging ability after the crisis, but the effectiveness of hedging risk is relatively low. Besides, the combination of CRFI and SHCI (the Shanghai composite index) is the most effective for risk reduction.     

Empirical Analysis of Stock Returns and Volatility: Evidence from Seven Asian Stock Markets Based on TAR-GARCH Model

This paper investigates the time-series behavior of stock returns for seven Asian stock markets. In most cases, higher average returns appear to be associated with a higher level of volatility. Testing the relationship between stock returns and unexpected volatility, the evidence shows that four out of seven Asian stock markets have significant results. Further analyzing the relationship between stock returns and time-varying volatility by using Threshold Autoregressive GARCH(1,1)-in-mean specification indicates that the null hypothesis of no asymmetric effect on the conditional volatility is rejected for the daily data. However, the null cannot be rejected for the monthly data.     

Financial crises and the dynamics of the spillovers between the U.S. and BRICS stock markets

We examine the spillover dynamics between the U.S. and BRICS stock markets using the multivariate DECO-GJR-GARCH model and spillover index method. We identify time variations in volatility equicorrelation and significant dynamic spillovers between these stock markets, as well as an increased impact of uncertainty on spillovers. Spillovers between markets intensify after the inception of the global financial crisis and subsequent European sovereign debt crisis. We also find, following the commencement of the crisis periods, that the U.S., Brazilian, and Chinese markets are net volatility transmitters, whereas the Russian, Indian, and South African markets are net recipients. These results shed new light on the information transmission channels between the U.S. and BRICS stock markets.     

Stock market comovements around the Global Financial Crisis: Evidence from the UK,BRICS and MIST markets

This paper analyses stock market co-movements around recent crises and explores the international portfolio diversification benefits available for UK investors holding a portfolio in the BRICS and MIST emerging markets. The application of conventional and regime-switch cointegration techniques suggests an absence of diversification benefits. Further evidence from application of a multivariate time-varying asymmetric model (i.e. AG-DCC) suggests that conditional correlation among the stock markets exhibits higher dependency when it is driven by negative shocks to the market. The asymmetric causality test provides supporting evidence of the decoupling hypothesis. The results indicate that the Chinese stock market is the most attractive option for the UK investor.     

Do long-short speculators destabilize commodity futures markets?

This paper contributes to the debate on the effects of the financialization of commodity futures markets by studying the conditional volatility of long–short commodity portfolios and their conditional correlations with traditional assets (stocks and bonds). Using several groups of trading strategies that hedge fund managers are known to implement, we show that long–short speculators do not cause changes in the volatilities of the portfolios they hold or changes in the conditional correlations between these portfolios and traditional assets. Thus calls for increased regulation of commodity money managers are, at this stage, premature. Additionally, long–short speculators can take comfort in knowing that their trades do not alter the risk and diversification properties of their portfolios.     

国际商品市场与股票市场的溢出效应——基于中美数据的VAR-MGARCH分析

基于VAR-MGARCH-BEKK模型,对国际商品市场与中美股票市场之间的均值与波动溢出效应进行了经验分析。结果表明,国际商品市场与中美股票市场之间存在着相互的均值溢出效应,国际商品市场对中美股票市场存在波动溢出效应,同时,美国股票市场对国际商品市场存在波动溢出效应;另外,中国应该尽快编制科学合理并适合自身国情的商品指数。     

Shock and Volatility Transmission in the Futures and Spot Markets: Evidence from Turkish Markets

This paper examines the volatility transmission mechanism between the futures and corresponding underlying asset spot markets, focusing on Turkish currency and stock index futures traded on the lately established Turkish Derivatives Exchange (TURKDEX). Employing multivariate generalized autoregressive conditional heteroskedasticity modeling, which allows for potential spillovers and asymmetries in the variance-covariance structure for the market returns, the paper investigates the volatility interactions among each of the three futures-spot market systems. For all market systems under study, the volatility spillovers are found to be important and bidirectional. For the stock index market system, in line with the previous literature, volatility shows asymmetric behavior and strong asymmetric shock transmission. The main implication is that investors need to account for volatility spillovers and asymmetries among the futures and the spot markets to correctly build hedging strategies.     

Multivariate FIAPARCH modelling of financial markets with dynamic correlations in times of crisis

This paper applies the vector AR-DCC-FIAPARCH model to eight national stock market indices' daily returns from 1988 to 2010, taking into account the structural breaks of each time series linked to the Asian and the recent Global financial crisis. We find significant cross effects, as well as long range volatility dependence, asymmetric volatility response to positive and negative shocks, and the power of returns that best fits the volatility pattern. One of the main findings of the model analysis is the higher dynamic correlations of the stock markets after a crisis event, which means increased contagion effects between the markets. The fact that during the crisis the conditional correlations remain on a high level indicates a continuous herding behaviour during these periods of increased market volatility. Finally, during the recent Global financial crisis the correlations remain on a much higher level than during the Asian financial crisis.     

Long-term Memory in Volatility: Some Evidence from International Securitized Real Estate Markets

While the long memory property is examined in the literature for the US REIT returns, this paper extends the analysis to international securitized real estate markets with the hope of finding answers or confirming prior stock market evidence regarding the presence (or absence) of long memory volatilities for 40 weekly real estate indices (original and hedged). Using a battery of five econometric tests on three alternative risk measures; weekly observed absolute and squared mean deviations and conditional variances, we find statistically significant evidence of long memory in the volatility structure of most securitized real estate markets studied. Volatility persistence is particularly strong in Asia, but is not consistent throughout the period of study.     

Asymmetric volatility connectedness between Islamic stock and commodity markets

This paper examines the asymmetric volatility connectedness amongst the Dow Jones Islamic Market Index (DJIM) and the Brent crude oil, gold, and silver markets. We use the Diebold and Yilmaz methodology to examine asymmetric volatility connectedness associated with bad (negative semi-variance) and good (positive semi-variance) volatility in these markets. We identify significant volatility connectedness between the DJIM and commodity markets, with the DJIM and Brent oil markets being the largest net contributors of spillovers. Furthermore, the evidence on semi-volatility connectedness displays asymmetric behavior. Bad volatilities are associated with net transmission of spillovers to other markets, except for silver. Our results have significant implications for investors dealing with the DJIM and commodity markets in terms of asset management and diversification.     

Asymmetric Price and Volatility Adjustments in Emerging Asian Stock Markets

This paper tests the hypothesis that stock returns in emerging stock markets adjust asymmetrically to past information. The evidence suggests that both the conditional mean and the conditional variance respond asymmetrically to past information. In agreement with studies dealing with developed stock markets, the conditional variance is an asymmetrical function of past innovations, rising proportionately more during market declines. More importantly, the conditional mean is also an asymmetrical function of past returns. Specifically, positive past returns are more persistent than negative past returns of an equal magnitude. This behaviour is consistent with an asymmetric partial adjustment price model where news suggesting overpricing (negative returns) are incorporated faster into current prices than news suggesting underpricing (positive returns). Furthermore, the asymmetric adjustment of prices to past information could be partially responsible for the asymmetries in the conditional variance if the degree of adjustment and the level of volatility are positively related.     

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.     

Los efectos de largo plazo de la asimetría y persistencia en la predicción de la volatilidad: evidencia para mercados accionarios de América Latina

This article proposes an extension to the CGARCH model in order to capture the characteristics of short-run and long-run asymmetry and persistence, and examine their effects in modeling and forecasting the conditional volatility of the stock markets from the region of Latin America during the period from 2 January 1992 to 31 December 2014. In the sample analysis, the estimation results of the CGARCH-class model family reveal the presence of short-run and long-run significant asymmetric effects and long-run persistency in the structure of stock price return volatility. The empirical results also show that the use of symmetric and asymmetric loss functions and the statistical test of Hansen (2005) are sound alternatives for evaluating the predictive ability of the asymmetric CGARCH models. In addition, the inclusion of long-run asymmetry and long-run persistency in the variance equation improves significantly the out of sample volatility forecasts for emerging stock markets of Argentina and Mexico.     

Long-term effects of the asymmetry and persistence of the prediction of volatility: Evidence for the equity markets of Latin America

This article proposes an extension to the CGARCH model in order to capture the characteristics of short-run and long-run asymmetry and persistence, and examine their effects in modeling and forecasting the conditional volatility of the stock markets from the region of Latin America during the period from 2 January 1992 to 31 December 2014. In the sample analysis, the estimation results of the CGARCH-class model family reveal the presence of short-run and long-run significant asymmetric effects and long-run persistency in the structure of stock price return volatility. The empirical results also show that the use of symmetric and asymmetric loss functions and the statistical test of Hansen (2005) are sound alternatives for evaluating the predictive ability of the asymmetric CGARCH models. In addition, the inclusion of long-run asymmetry and long-run persistency in the variance equation improves significantly the out of sample volatility forecasts for emerging stock markets of Argentina and Mexico.     

Impact of speculation and economic uncertainty on commodity markets

We examine the interactions between commodity futures returns and five driving factors (financial speculation, exchange rate, stock market dynamics, implied volatility for the US equity market, and economic policy uncertainty). Nonlinear causality tests are implemented after controlling for cointegration and conditional heteroscedasticity in the data over the period May 1990 – April 2014. Our results show strong evidence of unidirectional linear causality from commodity returns to excess speculation for the majority of the considered commodities, in particular for agriculture commodities. This evidence casts doubt on the claim that speculation is driving food prices. We also find unidirectional linear causality from energy futures markets to exchange rates and strong evidence of nonlinear causal dependence between commodity futures returns, on the one hand, and stock market returns and implied volatility, on the other hand. Overall, the new evidence found in this paper can be utilized for policy and investment decision-making.     

Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management

In this article we take a recent generalized VAR-GARCH approach to examine the extent of volatility transmission between oil and stock markets in Europe and the United States at the sector-level. The empirical model is advantageous in that it typically allows simultaneous shock transmission in the conditional returns and volatilities. Insofar as volatility transmission across oil and stock sector markets is a crucial element for portfolio designs and risk management, we also analyze the optimal weights and hedge ratios for oil-stock portfolio holdings with respect to the results. Our findings point to the existence of significant volatility spillover between oil and sector stock returns. However, the spillover is usually unidirectional from oil markets to stock markets in Europe, but bidirectional in the United States. Our back-testing procedures, finally, suggest that taking the cross-market volatility spillovers estimated from the VAR-GARCH models often leads to diversification benefits and hedging effectiveness better than those of commonly used multivariate volatility models such as the CCC-GARCH of Bollerslev (1990), the diagonal BEKK-GARCH of Engle and Kroner (1995) and the DCC-GARCH of Engle (2002).     

Global financial crisis and emerging stock market contagion: A volatility impulse response function approach

By employing the volatility impulse response (VIRF) approach, this paper presents a general framework for addressing the extent of contagion effects between the BRICSs’ and U.S. stock markets and how the BRICSs’ stock markets have been influenced in the context of the 2007–2009 global financial crisis. Our empirical results show during the period of 2007–2009 global financial crisis, there are significant contagion effects from the U.S. to the BRICSs’ stock markets. Yet, the degree of stock market reactions to such shocks differs from one market to another, depending on the level of integration with the international economy. Besides, the strengthened degree of stock market integration among the U.S. and BRICS has adverse effect such that if the 2007–2009 global financial crisis occurs today it may result in heavier impact on stock market volatility nowadays compared to the crisis-era.     

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.