Return and Volatility Transmission between World-Leading and Latin American Stock Markets: Portfolio Implications

Wing-Keung Wong,Shoaib Ali,Imran Yousaf

doi:10.3390/jrfm13070148

Abstract

This study uses the BEKK-GARCH model to examine the return-and-volatility spillover between the world-leading markets (USA and China) and four emerging Latin American stock markets over the global financial crisis of 2008 and the crash of the Chinese stock market of 2015. Regarding return spillover, our findings reveal a unidirectional return transmission from Mexico to the US stock market during the global financial crisis. During the crash of the Chinese stock market, the return spillover is found to be unidirectional from the US to the Brazil, Chile, Mexico, and Peru stock markets. Moreover, the results indicate a unidirectional return transmission from China to the Brazil, Chile, Mexico, and Peru stock markets during the global financial crisis and the crash of the Chinese stock market. Regarding volatility spillover, the results show the bidirectional volatility transmission between the US and the stock markets of Chile and Mexico during the global financial crisis. During the Chinese crash, the bidirectional volatility transmission is observed between the US and Mexican stock markets. Furthermore, the volatility spillover is unidirectional from China to the Brazil stock market during the global financial crisis. During the Chinese crash, the volatility spillover is bidirectional between the China and Brazil stock markets. Lastly, a portfolio analysis application has been conducted.

Highlights

The information transmissions across equity markets are of greater interest to investors and policymakers with increased financial integration all over the world
The results reveal that the past shocks in the Brazil and Mexican stock markets significantly affect the conditional volatility of the Chinese stock market during the global financial crisis
This study examines the return and volatility spillover between the world-leading and emerging Latin American (Brazil, Chile, Mexico, and Peru) stock markets during the full sample period, the global financial crisis, and the crash of the Chinese stock market

Summary

Introduction

The information transmissions (return and volatility) across equity markets are of greater interest to investors and policymakers with increased financial integration all over the world. If asset volatility is transferred from one market to another during turbulence or crisis, portfolio managers need to adjust their asset allocation (Bouri 2013; Syriopoulos et al 2015; Yousaf and Hassan 2019) and financial policymakers need to change their policies to reduce the contagion risk (Yang and Zhou 2017). Around 50% of the Chinese stocks lost more than half of their pre-crash market value This crash adversely affected the many other financial markets around the globe (Fang and Bessler 2017). Despite the importance of the Chinese crash to international portfolio managers, only Ahmed and Huo (2019) examined the volatility transmission between the Chinese and Asian stock markets during the crash of the Chinese stock market in 2015. The empirical research remains surprisingly limited on the area of linkages between equity markets during the crash of the Chinese stock market

Objectives

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Conclusion