Time‐frequency dynamics between fear connectedness of stocks and alternative assets

Abstract

AbstractWe examine linkages between the time‐frequency dynamics of fear (VIX) connectedness across global stock markets and alternative asset markets. To this end, we utilize Diebold and Yilmaz, International Journal of Forecasting, 2012, 28, 57–66; Diebold and Yilmaz, Journal of Econometrics, 2014, 182, 119–134; and Baruník and Křehlík, Journal of Financial Econometrics, 2018, 16, 271–296 connectedness methods to measure the total, short‐, medium‐ and long‐term connectedness. We subsequently use the rolling‐window wavelet correlation framework of Polanco‐Martínez et al. Physica A: Statistical Mechanics and Its Applications, 2018, 490, 1211–1227 to investigate the dynamic relationship structure among global equity market fear and fear in alternative asset markets, namely oil (OVX), gold (GVZ), currency (EVZ), and bond (TYNVI). We find that OVX drives the underlying VIX connectedness of the global equity markets during stress periods. The results also suggest the prospects of a reverse hedge that is driven by GVZ when the demand for gold intensifies. Furthermore, there are structural shifts in EVZ following Brexit, highlighting a negative relationship with the VIX connectedness. Finally, we find that the VIX connectedness typically moves in the opposite direction to the TYNVI. These results are insightful in realizing vulnerable stock markets' behaviour and explaining investors' sentiments and their shifts over time in asset allocations.