Abstract
This paper investigates linkages among equity market returns and volatility spillovers in the following countries: Germany, United Kingdom, China, Russia, and Turkey. MARMA, GARCH, GARCH-in-mean, and exponential GARCH (EGARCH) methodologies are applied to daily data on country exchange-traded funds (ETF) based on the MSCI indices from 31 March 2011 to 11 March 2016. The results of the analysis show the existence of significant co-movements of returns among the countries in the sample. ETF returns in Germany, UK, and Russia affect returns in all of the other sample countries. Implications of these findings are explored in terms of portfolio diversification. In addition, the highest volatilities are exhibited by Russia and Turkey. On the other hand, the UK and the Chinese markets have the lowest volatilities. Also, there is a strong evidence of volatility spillovers. All of the countries in the sample, with the exception of UK and Turkey, experience volatility spillovers from other markets. Finally, because of the risk-return trade-off, we analyzed the effect of volatility of the market on its returns and found that only in the UK volatility of the market had a positive effect on its future returns: that an increase in volatility leads to a rise in future ETF returns in the UK.
Highlights
This paper studies return and volatility linkages among country equity markets using representative broad market index Exchange-Traded Funds or exchange-traded funds (ETF)
We extended our analysis and ran generalized autoregressive conditional heteroskedastic (GARCH)-in-mean (GARCH-M (1,1)) model to investigate the question of in which of the selected markets an increase in volatility leads to a rise in future returns (Table 4)
The persistence parameter β is very large for Russian market (0.9940) and German market (0.9896), implying that the variance moves slowly through time
Summary
Higher returns (in the form of higher yields in government bonds and interest rates) in some of the emerging markets (e.g. Brazil, Russia, and Turkey) attracted capital flows from the US and the EU; culminating in emerging country equity markets’ spectacular performance until the last quarter of 2013 (Performance.morningstar.com, 2014). While the rates are still close to zero in Europe, US and in Japan the expectation that the FED would soon raise the rates in 2014–2015 gave rise to the reversal of the capital flows since investors started to bring their funds back causing many emerging country currencies to depreciate. The reaction of the equity markets was similar in that many of the equity market indices declined both in terms of local currencies as well as in dollar terms To defend their currencies both Russia and Turkey raised interest rates. On the other hand, have increased due to Western embargo following the Ukrainian conflict and annexation of Crimea together with substantially lower oil prices (Bank, 2015; Stats.oecd.org, 2015)
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