Abstract
This paper studies the US and global economic fundamentals that exacerbate emerging stock markets volatility and can be considered as systemic risk factors increasing financial stability vulnerabilities. We apply the bivariate HEAVY system of daily and intra-daily volatility equations enriched with powers, leverage, and macro-effects that improve its forecasting accuracy significantly. Our macro-augmented asymmetric power HEAVY model estimates the inflammatory effect of US uncertainty and infectious disease news impact on equities alongside global credit and commodity factors on emerging stock index realized volatility. Our study further demonstrates the power of the economic uncertainty channel, showing that higher US policy uncertainty levels increase the leverage effects and the impact from the common macro-financial proxies on emerging markets’ financial volatility. Lastly, we provide evidence on the crucial role of both financial and health crisis events (the 2008 global financial turmoil and the recent Covid-19 pandemic) in raising markets’ turbulence and amplifying the volatility macro-drivers impact, as well.
Highlights
A common stylized fact about emerging economies is the high volatility of their stock markets (De Santis 1997; Aggarwal et al 1999; Xu 1999; Cano-Berlanga and Giménez-Gómez 2018)
After investigating the significant macro-financial linkages in emerging economies, we further explore the significant effect of two crisis events on equity markets, one financial and one health crisis: the 2008 Global Financial Crisis (GFC) and the Covid-19 pandemic period (COVID)
The GFC and COVID impacts (Table 4, Panel A and B, respectively) magnify most Heavy terms and Arch asymmetries. Additional results with both crises dummies jointly significant in the bivariate m-double asymmetric power (DAP) system are reported in Table 10 of the Appendix, where we present the whole equations’ estimations with the preferred combination of GFC and COVID dummies incorporated in the returns and realized measure specifications
Summary
A common stylized fact about emerging economies is the high volatility of their stock markets (De Santis 1997; Aggarwal et al 1999; Xu 1999; Cano-Berlanga and Giménez-Gómez 2018). Filling a notable gap of the academic literature related to the high-frequency macro-financial linkages in emerging economies our novel findings are summarized as follows: (i) higher volatility of US Economic Policy Uncertainty (EPU), elevated US financial uncertainty, tighter credit conditions, increased commodity prices, and stronger infectious disease news impact on US equities, all five economic forces intensify emerging stock markets volatilities, (ii) the economic uncertainty channel (proxied by the US EPU level) further exacerbates asymmetries and macro-ramifications on emerging equities, and (iii) both global crisis events, the subprime crisis and the current pandemic-led crash, boost emerging stock market volatility through the time-varying pattern of the HEAVY’s parameters with the macro-effects included, as well In this vein, our analysis focuses on the macro-financial linkages running from the macroeconomy to the financial sector by incorporating important economic fundamentals in emerging equity volatility modeling for a long sample period covering the recent health crisis-driven market crash.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
