Return and volatility spillover across equity markets between China and Southeast Asian countries

Ngo Thai Hung

doi:10.1108/jefas-10-2018-0106

Abstract

Purpose This paper aims to study the daily returns and volatility spillover effects in common stock prices between China and four countries in Southeast Asia (Vietnam, Thailand, Singapore and Malaysia). Design/methodology/approach The analysis uses a vector autoregression with a bivariate GARCH-BEKK model to capture return linkage and volatility transmission spanning the period including the pre- and post-2008 Global Financial Crisis. Findings The main empirical result is that the volatility of the Chinese market has had a significant impact on the other markets in the data sample. For the stock return, linkage between China and other markets seems to be remarkable during and after the Global Financial Crisis. Notably, the findings also indicate that the stock markets are more substantially integrated into the crisis. Practical implications The results have considerable implications for portfolio managers and institutional investors in the evaluation of investment and asset allocation decisions. The market participants should pay more attention to assess the worth of across linkages among the markets and their volatility transmissions. Additionally, international portfolio managers and hedgers may be better able to understand how the volatility linkage between stock markets interrelated overtime; this situation might provide them benefit in forecasting the behavior of this market by capturing the other market information. Originality/value This paper would complement the emerging body of existing literature by examining how China stock market impacts on their neighboring countries including Vietnam, Thailand, Singapore and Malaysia. Furthermore, this is the first investigation capturing return linkage and volatility spill over between China market and the four Southeast Asian markets by using bivariate VAR-GARCH-BEKK model. The authors believe that the results of this research’s empirical analysis would amplify the systematic understanding of spillover activities between China stock market and other stock markets.

Highlights

IntroductionTo systematically understand the connectedness and correlation among different financial markets is significant for investors, financial institutions and governments (Zhou et al, 2012)
We find that the China stock market has a substantial impact on the four of Southeast Asian Countries in our data sample
We observe that the stock return linkage between China and other stock markets seems to be negative after the global financial crisis

Summary

Introduction

To systematically understand the connectedness and correlation among different financial markets is significant for investors, financial institutions and governments (Zhou et al, 2012). The process of increased financial integration has been followed by a growing trend of international and regional trade agreements among countries (Balli et al, 2015). Studies predominantly centered on the connectedness among the financial markets of developed countries. Hamao et al (1990) pointed out price volatility transmissions from New York to London and Tokyo, London to Tokyo. In a same vein, Koutmos and Booth (1995) demonstrated that negative innovations in three developed markets (New York, Tokyo and London) increase volatility in the market to trade more than positive innovations do

Objectives

Methods

Results

Conclusion