Abstract
The study examines the return and volatility spillover among Asian stock markets in India, Hong Kong, Japan, China, Jakarta, and Korea using a six-variable asymmetric generalized autoregressive conditional heteroscedasticity–Baba, Engle, Kraft, and Kroner (GARCH-BEKK) model during February 2, 2007, to February 29, 2010. The author finds evidence of bidirectional return, shock, and volatility spillover among most of the stock markets. The magnitude of volatility linkages is low indicating weak integration of Asian stock markets. The study finds that own volatility spillover is higher than cross-market spillover. The overall persistence of stock market volatility is highest for Japan (0.931) and lowest for China (0.824). The implication of weak integration is that investors will benefit from reduction of diversifiable risk.
Highlights
The growing international integration of financial markets has prompted several empirical studies to examine the mechanism through which stock market movements are transmitted around the world
The results indicated that there was no evidence of spillover effect in terms of return and volatility between the stock exchanges in China and U.S market
In the section titled “The Evidence of Stock Market Linkages,” we report the evidence of market linkages in the estimated six-variable asymmetric GARCH-BEKK model
Summary
The growing international integration of financial markets has prompted several empirical studies to examine the mechanism through which stock market movements are transmitted around the world These studies evaluate how stock returns in one national stock market influence the returns of other stock markets. These studies further examine their implications for pricing securities, hedging, other trading strategies, and framing regulatory policies. These issues have been of heightened interests to all the participants in the stock markets in the wake of October 1987 international crash of stock markets that saw large correlated price movements across most of the stock markets of the world. From the perspective of the global investors, weak stock market linkage in the form of less than perfect correlation between their returns offers potential gains from international portfolio diversification, whereas strong market linkage or comovement in returns eliminates the potential benefits of diversification
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