Abstract
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.
Highlights
The international information transmission mechanisms across markets, through both returns and volatility, have theoretical significance and a wide range of practical implications
This paper provides a new insight into global financial interconnectedness through the analysis of intra- and inter-regional return and volatility transmission across 21 developed and emerging markets from Asia, the Americas, Europe, and Africa
The results demonstrate that futures markets provide more efficient channels of inter-regional information transmission than stock markets because the magnitude of return and volatility spillovers is larger using stock index futures data
Summary
The international information transmission mechanisms across markets, through both returns and volatility, have theoretical significance and a wide range of practical implications. The phenomenon of volatility spillovers occurs when volatility in one market triggers volatility in other markets This effect can be visible during periods of turmoil which diminishes the benefits of international portfolio diversification for investors. The investigation of return and volatility spillovers between stock markets within various geographical regions is an important topic, which contributes to our knowledge about global financial interconnectedness. There are various fields of literature to which the analysis of return and volatility spillovers is related, for example, the literature on financial contagion, hedging, asset allocation, and stock market efficiency. While return and volatility spillovers can limit the benefits of global diversification, the knowledge about international information transmission mechanisms can provide the opportunity to
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