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.     

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.     

Procyclical volatility in Chinese stock markets

Review of Quantitative Finance and Accounting - We investigate the macroeconomic determinants of stock market volatility in China using the two-component GARCH-MIDAS model of Engle et al....     

Transmission of volatility between stock markets

This article investigates why, in October 1987, almost all stockmarkets fell together despite widely differing economic circumstances.We construct a model in which 'contagion' between markets occursas a result of attempts by rational agents to infer informationfrom price changes in other markets. This provides a channelthrough which a 'mistake' in one market can be transmitted toother markets. We offer supporting evidence for contagion effectsusing two different sources of data.     

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.     

R&D, knowledge spillovers and stock volatility

Firms improve their know‐how not only by innovations (producing new knowledge), but also by knowledge spillovers (learning from others). The objective of this study is to test for two major hypotheses developed from a theoretical model explaining the relationship between R&D, knowledge spillovers and stock volatility. Analytically, the model suggests that asymmetric information caused by R&D activities with uncertain future output increases stock volatility, even though dividends and consumptions remain unchanged. However, interfirm knowledge spillovers have a negative impact on stock volatility by reducing the degree of asymmetric information. Both hypotheses are supported by empirical evidence from this study.     

Intra- and inter-regional return and volatility spillovers across emerging and developed markets: Evidence from stock indices and stock index futures

We provide empirical evidence on the patterns of intra- and inter-regional transmission of information across 10 developed and 11 emerging markets in Asia, the Americas, Europe and Africa using both stock indices and stock index futures. The main transmission channels are examined in the period from 2005 to 2014 through the analysis of return and volatility spillovers around the most recent crises based on the generalized vector autoregressive framework. Our findings demonstrate that markets are more susceptible to domestic and region-specific volatility shocks than to inter-regional contagion. A novel result reported in our study is a difference in patterns of international signals transmission between models employing indices and futures data. We conclude that futures data provide more efficient channels of information transmission because the magnitude of return and volatility spillovers across futures is larger than across indices. Our findings are relevant to practitioners, such as stock market investors, as well as policy makers and can help enhance their understanding of financial markets interconnectedness.     

Impact of stock market trading on currency market volatility spillovers

This research aims to detect the volatility linkages among various currencies during operating and non-operating hours of three major stock markets (Tokyo, London and New York) by employing bivariate VAR-BEKK-GARCH model in selected currency pairs. In particular, the aim is to analyze whether the major stock markets have a differential impact on volatility linkages in currency markets. The results indicate that volatility linkages in intraday are far stronger then in daily results. One remarkable result is that rather than major currencies, some minor and exotic currencies play a leading role in volatility transmission during trading hours of major stock markets.     

Intraday volatility in the stock index and stock index futures markets

We examine the intraday relationship between returns and returnsvolatility in the stock index and stock index futures markets.Our results indicate a strong intermarket dependence in thevolatility of the case and futures returns. Price innovationsthat originate in either the stock or futures markets can predictthe future volatility in the other market. We show that thisrelationship persists even during periods in which the dependencein the returns themselves appears to weaken. The findings arerobust to controlling for potential market frictions such asasynchronous trading in the stock index. Our results have implicationsfor understanding the pattern of information flows between thetwo markets.     

The relationship between stock returns and volatility in international stock markets

This study examines the relationship between expected stock returns and volatility in the 12 largest international stock markets during January 1980 to December 2001. Consistent with most previous studies, we find a positive but insignificant relationship during the sample period for the majority of the markets based on parametric EGARCH-M models. However, using a flexible semiparametric specification of conditional variance, we find evidence of a significant negative relationship between expected returns and volatility in 6 out of the 12 markets. The results lend some support to the recent claim [Bekaert, G., Wu, G., 2000. Asymmetric volatility and risk in equity markets. Review of Financial Studies 13, 1–42; Whitelaw, R., 2000. Stock market risk and return: an empirical equilibrium approach. Review of Financial Studies 13, 521–547] that stock market returns are negatively correlated with stock market volatility.     

Return and volatility spillovers between currency and bond markets in India

This paper examines the return and volatility spillovers between the foreign exchange and bond markets of India using a bivariate asymmetric BEKK-GARCH (1,1) model for the period 4 April 2005 to 31 March 2017. We find the evidence of bidirectional return and volatility spillovers with asymmetric effects between these two markets. The spillovers are evidenced even during the periods when foreign portfolio investments in the Indian bond markets were relatively low suggests the existence of strong inter-linkages between both the markets.     

Dependences and volatility spillovers between the oil and stock markets: New evidence from the copula and VAR-BEKK-GARCH models

This paper examines the dynamic relationship between the oil market and stock markets from two perspectives: dependence between the crude oil market (WTI) and stock markets of the US and China, and volatility spillovers between them during 1991–2016. We further analyze structural breaks of market dependences and consider the extent of their influence on such relationships. Our vine-copula results show that the dependences between the three paired markets, WTI-US, WTI-China and US-China, vary dynamically across the six identified structural break periods. In particular, the dependence between WTI-US is stronger and more volatile than that between WTI-China during most of the periods. The dependence between US-China remains at a lower level in the earlier periods, but increases in the final period. Our VAR-BEKK-GARCH results demonstrate distinctive volatility spillovers across these periods, with varying directionality, in response to the structural changes. Overall, our results indicate that the oil market stimulates rapid and continual fluctuations in market dependences, which become manifest most acutely in the aftermath of the Financial Crisis of 2007–08, demonstrating the increasing interdependence between the oil and stock markets. Further, the growing influence of China on the dynamics of these relationships, in the period following the Great Recession, presents evidence that it begins to assume an increasingly important role in global economic recovery.     

Correlations in price changes and volatility across international stock markets

The short-run interdependence of prices and price volatilityacross three major international stock market is studied. Dailyopening and closing prices of major stock indexes for the Tokyo,London, and New York stock markets are examined. The analysisutilizes the autoregressive conditionally heteroskedastic (ARCH)family of statistical models to explore these pricing relationship.Evidence of price volatility spillovers from New York to Tokyo,London to Tokyo, and New York to London is observed, but noprice volatility spillover effects in other directions are foundfor the pre-October 1987 period.     

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.     

Modelling return and conditional volatility exposures in global stock markets

This article empirically investigates the exposure of country-level conditional stock return volatilities to conditional global stock return volatility. It provides evidence that conditional stock market return volatilities have a contemporaneous association with global return volatilities. While all the countries included in the study exhibited a significant and positive relationship to global volatility, emerging market volatility exposures were considerably higher than developed market exposures. JEL Classification G12     

Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets

This article examines sudden changes in volatility for five Gulf area Arab stock markets using the iterated cumulative sums of squares (ICSS) algorithm and analyzes their impacts on the estimated persistence of volatility. This algorithm identifies large shifts in volatility of the stock markets during the weekly period 1994 to 2001. In contrast to Aggarwal et al. [Aggarwal, R., Inclan, C., & Leal, R., 1999, Volatility in emerging markets. Journal of Financial and Quantitative Analysis 34, 33-55], this paper found that most of the Gulf Arab stock markets are more sensitive to major global events than to local and regional factors. The 1997 Asian crisis, the collapse of oil prices in 1998 after the crisis, the adoption of the price band mechanism by OPEC in 2000, and the September 11th attack have been found to have consistently affected the Gulf markets. Accounting for these large shifts in volatility in the GARCH(1,1) models significantly reduces the estimated persistence of the volatility in the Gulf stock markets.     

Idiosyncratic volatility and cross‐sectional stock returns in Southeast Asian stock markets

We examine the role of idiosyncratic risk in five ASEAN markets of Malaysia, Singapore, Thailand, Indonesia, and the Philippines. Our research was motivated by the findings of Ang et al. (2006, 2009) of a ‘puzzling’ negative relation between idiosyncratic volatility and 1‐month ahead stock returns in developed markets and the suggestion of the ubiquity of these results in other markets. In contrast, we find no evidence of an idiosyncratic volatility puzzle in these Asian stock markets; instead, we document a positive relationship between idiosyncratic volatility and returns in Malaysia, Singapore, Thailand, and Indonesia and no relationship in the Philippines. The idiosyncratic volatility trading strategy could result in significant trading profits in Malaysia, Singapore, Thailand, and to some extent in Indonesia. Our study underscores the fact that generalizing empirical results obtained in developed stock markets to new and emerging markets could potentially be misleading.     

Correlation in price changes and volatility of major Latin American stock markets

This paper seeks to investigate the short-run dynamics between five major Latin American stock markets (Argentina, Brazil, Chile, Colombia and Mexico). Unlike previous research on these markets, the joint distribution of stock returns is estimated as a vector autoregression (VAR) with innovations following an exponential GARCH process. Our study is carried out using closing stock market prices covering the period 25 May 1992 to 16 May 1997. The results revealed that these countries have significant first and second moment time dependencies. In general, the markets of these countries exhibit stronger volatility than mean spillovers. Further, our results indicate that these markets exhibit stronger volatility spillovers than other regions of the world. In view of these dependencies, the conditional correlations between these markets are different from their conventional simple counterparts. Since the correlation is the catalyst in portfolio diversification and an essential parameter in the calculation of the cost of capital, we anticipate that international investors and corporate managers will find our results very interesting.     

Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico

This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.     

On the volatility spillover between lslamic and conventional stock markets: A quantile regression analysis

This paper aims at analyzing the degree and structure of interdependencies in terms of volatility (transmission, contagion) between Islamic and conventional stock markets on calm periods and at times of financial fragility and crisis. We focused on the recent financial instability periods and used the Quantile Regression-based GARCH model. Main results lead to very interesting conclusions. First, it has been found that Islamic stock markets are not totally immune to the global financial crisis. Second, a very strong interdependence is sensed from the conventional to the Islamic stock markets, especially, from the conventional developed markets to the Islamic Emerging and Arab markets and to the Islamic developed markets. Finally, it has been proved that the interdependencies from conventional to Islamic markets are propagated between Islamic markets. Our findings suggest that the Islamic finance industry does not seem able to provide cushion against economic and financial shocks that affect conventional markets.