A Multivariate Investigation of the Volatilities and Co-Volatilities of Equity Markets between Australia and Three Major Asian Pacific Equity Markets.

Abstract

This preliminary study employs VECH-Multivariate Generalized Conditional Heteroskedasticity (MGARCH) model to test the cluster volatility of asset returns transmission impact among four Asian-Pacific equity markets: Australia, India, Hong Kong and Japan. Daily asset returns of the stock exchange indices are used for the period 2004 to 2014. Evidence shows that past shocks arising from the India stock market display the strongest evidence of impact on its ‘own’ future market volatility compared to the shocks stemming from the other three stock markets. This paper reveals the presence of high and positive lagged cross-volatility persistence between all countries. Australia in particular, exposes evidence of strong volatility persistence from all of the three markets to Australia. The strongest cross-volatility shock coefficients between countries are between Australia and Japan. India and Japan is the weakest. These results further provide strong evidence that all exchanges are well-integrated markets with high and positive spillovers. Asset returns of each exchange are linked. The volatility of one market does lead the volatility of other markets in the Asian-Pacific region. Shocks on a market do increase the volatility on another market. Finally this paper concludes that as these markets become more integrated, so this can lead to reduced opportunities for future global portfolio risk diversification.