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.     

Interdependence and Volatility Spillovers Under Market Liberalization: The Case of Istanbul Stock Exchange

This paper analyzes stock returns and volatility relations between the Istanbul Stock Exchange (ISE) and the global market as represented by stock markets in the US, the UK, Japan and Germany. Results from monthly data and multivariate cointegration tests suggest that the ISE became significantly integrated in the global market only in the period following market liberalization in late 1989. We also find evidence based on GARCH estimations that capital liberalization actually mitigated, rather than intensified, volatility in the ISE. Our results further suggest that the Asian crisis in mid‐1997 and the consequent Russian economic meltdown in mid‐1998 are partly responsible for the recent excessive volatility in the Turkish market. The results also identify the US and the UK markets as dominate sources of volatility spillovers for the ISE, even in the period following the Asian‐Russian crises. Consequently, it appears that the two matured markets of the US and the UK shoulder significant responsibility for the stability and financial health of smaller emerging markets like the ISE.     

Volatility dependences of stock markets with structural breaks

We develop a Vector Heterogeneous Autoregression model with Continuous Volatility and Jumps (VHARCJ) where residuals follow a flexible dynamic heterogeneous covariance structure. We employ the Bayesian data augmentation approach to match the realised volatility series based on high-frequency data from six stock markets. The structural breaks in the covariance are captured by an exogenous stochastic component that follows a three-state Markov regime-switching process. We find that the stock markets have higher volatility dependence during turmoil periods and that breakdowns in volatility dependence can be attributed to the increase in market volatilities. We also find positive correlations between the Asian stock markets, the European stock market, and the UK stock market. The US stock market has positive correlations with all other markets for most of the sample periods, indicating the leading position of US stock market in the global stock markets. In addition, the proposed three-state VHARCJ model with Dynamic Conditional Correlation (DCC) and break structure under student-t distribution has a superior density forecast performance as compared to the competing models. The forecast models with structural breaks outperform those without structural breaks based on the log predicted likelihood, the log Bayesian factor, and the root mean square loss function.     

Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan. This revised version was published online in August 2006 with corrections to the Cover Date.     

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.     

The Impulse of Stock Market Volatility and the Market Crash of October 1987

This paper employs the technique of variance decomposition and impulse response functions to examine the dynamic nature of stock market volatility relationships among six major countries during the pre, around, and post October 1987 crash period. During the period around the crash, the US stock market volatility explains much better the variations of the stock market volatility of Australia, Hong Kong, Japan, Singapore and the UK. Our findings clearly indicate that the crash originated in the US and then spread to other major stock markets.     

Modelling International Price Relationships and Interdependencies Between the Stock Index and Stock Index Futures Markets of Three EU Countries: A Multivariate Analysis

This paper addresses the important relationship between stock index and stock index futures markets in an international context. By simply examining the spot‐futures relationship within a single country as most of the extant literature does and thus ignoring possible market interdependencies between countries, the dynamics of price adjustments may be misspecified and thus findings misleading. The main contribution of the paper is to improve our understanding of the pricing relationship between spot and futures markets in the light of international market interdependencies. Using a multivariate VAR‐EGARCH methodology, the paper investigates stock index and stock index futures market interdependence, that is lead‐lag relationships and volatility interactions between the stock and futures markets of three main European countries, namely France, Germany and the UK. In addition, the paper explicitly accounts for potential asymmetries that may exist in the volatility transmission mechanism between these markets. The main conclusions of the paper imply that investors need to account for market interactions across countries to fully and correctly exploit the potential for hedging and diversification.     

Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of more than five years of 5‐minute intraday stock index returns for major European stock indices and US macroeconomic surprises, conditional means and volatility behaviour in European markets were investigated. The findings suggest that the opening of the US stock market significantly raises the level of volatility in Europe, all markets responding in an identical fashion. Furthermore, US macroeconomic surprises exert an immediate and major impact on both the European stock markets’ intraday returns and volatilities. Thus, high frequency data appear to be critical for the identification of news impacting the markets.     

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

This paper contributes to the current debate on the empirical validity of the decoupling hypothesis of the Islamic stock market from its mainstream counterparts by examining return and volatility spillovers across the global Islamic stock market, three main conventional national stock markets (the US, the UK and Japan) and a number of influential macroeconomic and financial variables over the period from July 1996 to June 2016. To that end, the VAR-based spillover index approach based on the generalized VAR framework developed by Diebold and Yilmaz (2012) is applied. The empirical analysis shows strong interactions in return and volatility among the global Islamic stock market, the conventional stock markets and the set of major risk factors considered. This finding means that the Islamic equity universe does not constitute a viable alternative for investors who wish to hedge their investments against the vagaries of stock markets, but it is exposed to the same global factors and risks hitting the conventional financial system. Therefore, this evidence leads to the rejection of the decoupling hypothesis of the Islamic stock market from conventional stock markets, which has significant implications for faith-based investors and policy makers in terms of portfolio diversification, hedging strategies and contagion risk.     

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 determination and international transmission of stock market volatility

This paper extends the literature on low-frequency analysis of the causes and transmission of stock market volatility. It uses end-monthly data on stock market returns, interest rates, exchange rates, inflation, and industrial production for five countries (Britain, France, Germany, Japan, and the US) from July 1973 to December 1994. Efficient portfolios of world, European, and Japanese/US equity are first constructed, the existence of multivariate cointegrating relationships between them is demonstrated, and the transmission of conditional volatility between them is described. The transmission of conditional volatility from world equity markets and national business cycle variables to national stock markets is then modeled. Among the main findings are: first, world equity market volatility is caused mostly by volatility in Japanese/US markets and transmitted to European markets, and second, changes in the volatility of inflation are associated with changes of the opposite sign in stock market volatility in all markets where a significant effect is found to exist. To the extent that the volatility of inflation is positively related to its level, this implies that low inflation tends to be associated with high stock market volatility.     

Volatility and correlation in international stock markets and the role of exchange rate fluctuations

This paper develops a direct, explicit model for the role of exchange rate fluctuations in international stock markets and examines how and to what extent volatility and correlations in equity markets are influenced by exchange rate fluctuations. Evidence presented in this paper indicates that a higher foreign exchange rate variability mostly increases local stock market volatility but decreases volatility for the US stock market. The extent to which stock market volatility is influenced by foreign exchange variability is greater for local markets than for the US market, due to the fact that exchange rate changes are more strongly correlated with local equity market returns than the US market returns. We find that a higher exchange rate fluctuation marginally decreases the US/local equity market correlation. While exchange rate fluctuations held a relatively large fraction of the variation in local stock market returns, there was no significant influence on the US/local equity market correlation.     

Stock market integration between the UK and the US: Evidence over eight decades

This study investigates how the impact made on stock market integration by macroeconomic determinants such as various measures of convergence and financial volatility, as well as crisis episodes, varies over the period 1935–2015. We gauge how the level of integration between the UK and US stock markets changes across three monetary regimes during this period: pre–Bretton Woods (BW), the BW fixed exchange rate, and the post-BW flexible rates. Our empirical results suggest that integration was strongest under the post-BW regime and weakest under the BW regime. We further demonstrate that stock market integration between the two markets has been driven largely by macroeconomic convergence and financial volatility as well as by crises, especially since the demise of the BW system.     

Can happiness predict future volatility in stock markets?

In this paper, we use the Twitter based happiness index as a proxy for investor sentiment in order to examine whether happiness influences future market volatility of country VIX indexes. Our sample includes the major stock markets of the USA, Canada, UK, Germany, France, Netherlands, Switzerland, Japan, China, Hong Kong, India, Brazil, South Korea, and South Africa. Using linear and nonlinear causality tests, we find that Twitter happiness significantly causes the future volatility of the sample countries. The robustness checks show no divergence from our primary findings and provide strong evidence of a nonlinear relationship between investor sentiment and future stock market volatility.     

Causality in volatility and volatility spillover effects between US, Japan and four equity markets in the South China Growth Triangular

In examining co-movement across international stock markets, previous researchers usually pre-determine the direction of causation and neglect the Chinese equity markets. In this study, we examine the spillover effects of volatility among the two developed markets and four emerging markets in the South China Growth Triangular using Chueng and Ng's causality-in-variance test. Several findings deserve mention: (1) the Japanese stock market affects the US stock market and there is a feedback relationship between the Hong Kong and US stock market. (2) Markets of the SCGT are contemporaneously correlated with the return volatility of the US market. (3) Econometric models constructed according to the results of variance-in-causality tests have greater explanatory power than the conventional GARCH(1,1) model. (4) Using the return volatility of foreign exchange as a proxy for informational arrival can explain excess kurtosis of a stock return series, especially for the less open emerging market. (5) Geographic proximity and economic ties do not necessarily lead to a strong relationship in volatility across 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.     

Circuit Breakers,Trading Collars,and Volatility Transmission Across Markets: Evidence from NYSE Rule 80A

The NYSE's Rule 80A attempted to delink the futures and equity markets by limiting index arbitrage trades in the same direction as the last trade to reduce stock market volatility. Rule 80A leads to a small but statistically significant decline in intraday U.S. equity market volatility. In addition, the results are asymmetric: volatility is dampened more in a rising market than in a declining one. These results suggest that, to a limited extent, rule restrictions on trading can sufficiently delink the futures and equity markets enough to reduce the transmission of volatility.     

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).     

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。     

Stock market volatility and business cycle: Evidence from linear and nonlinear causality tests

This paper investigates the relationship between stock market volatility and the business cycle in four major economies, namely the US, Canada, Japan and the UK. We employ both linear and nonlinear bivariate causality tests and we further conduct a multivariate analysis to explore possible spillover effects across countries. Our results suggest that there is a bidirectional causal relationship between stock market volatility and the business cycle within each country and additionally reveal that the recent financial crisis plays an important role in this context. Finally, we identify a significant impact of the US on the remaining markets.