Abstract
The main aim of this paper is to investigate volatility spillover effects, the impact of past volatility on present market movements, the reaction to positive and negative news, among selected financial markets. The sample stock markets are geographically dispersed on different continents, respectively North America, Europe and Asia. We also investigate whether selected emerging stock markets capture the volatility patterns of developed stock markets located in the same region. The empirical analysis is focused on seven developed stock market indices, i.e. IBEX35 (Spain), DJIA (USA), FTSE100 (UK), TSX Composite (Canada), NIKKEI225 (Japan), DAX (Germany), CAC40 (France) and five emerging stock market indices, i.e. BET (Romania), WIG20 (Poland), BSE (India), SSE Composite (China) and BUX (Hungary) from January 2000 to June 2018. The econometric framework includes symmetric and asymmetric GARCH models i.e. EGARCH and GJR which are performed in order to capture asymmetric volatility clustering, interdependence, correlations, financial integration and leptokurtosis. Symmetric and asymmetric GARCH models revealed that all selected financial markets are highly volatile, including the presence of leverage effect. The stock markets in Hungary, USA, Germany, India and Canada exhibit high positive volatility after global financial crisis.
Highlights
The degree of financial integration is different for developed markets compared to emerging markets, this variation being an essential aspect of the investment process
A research study conducted by Dutta (2014) based on application of Generalised Autoregressive Conditional Heteroskedasticity (GARCH), EGARCH and GJR models found that positive shocks are more common than negative shocks
Our research paper provides additional empirical evidence regarding investment opportunities and risk management based on international portfolio diversification generated by abnormal volatility transmission and contagion patterns between emerging and developed stock markets
Summary
The degree of financial integration is different for developed markets compared to emerging markets, this variation being an essential aspect of the investment process. Financial liberalization is associated with the idea of achieving very attractive investment opportunities Portfolio diversification represents an essential investment strategy in managing stock market risks. Spulbar and Birau (2019) suggested that volatility does not diverge to infinity and seems to react significantly different considering the case of high positive or high negative stock returns. Portfolio diversification strategy is a representative phenomenon of quantitative finance, most often applied in relation to low or negative correlations between financial assets, such as stock market indices. A research study conducted by Dutta (2014) based on application of GARCH, EGARCH and GJR models found that positive shocks are more common than negative shocks
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