Asymmetric BEKK Model Research Articles

Global pandemic crisis and risk contagion in GCC stock markets

This study investigates how the COVID-19 outbreak has shaped the volatility spillover between oil and Gulf Cooperation Council (GCC) stock markets. Contagion analysis is conducted by implementing a vector error correction (VECM) asymmetric BEKK model, wherein both cointegration and asymmetric features are considered. Financial market uncertainty caused by the recent health crisis is captured using Baker et al.’s (2020) newly developed infectious disease tracker. Our results indicate a significant discrepancy in the GCC group, as shock and volatility linkages between oil and equities are more apparent for some countries but not for others. The estimated VECM-asymmetric BEKK model reveals cross-market asymmetric spillover effects only in Kuwait, Qatar, and Saudi Arabia. We report that the global pandemic has strongly affected crude oil market volatility, while the GCC region seems to be less affected by the emergence of the new infectious disease. Our findings underscore the diversification opportunities offered by Gulf equity markets to international investors.

The complex relationship between inflation and equity returns

PurposeTo investigate the complex relationship between inflation, inflation uncertainty and equity returns.Design/methodology/approachThis paper uses a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model to investigate the relationship between inflation, inflation uncertainty and equity returns.FindingsUsing monthly inflation and equity returns data for the G7 and EM7 economies, we find that the effects of inflation and inflation uncertainty on equity returns vary across countries.Research limitations/implicationsThe mixed evidence we find potentially reflects the changing dynamics, policy regimes, economic shocks and country-specific factors (such as differences in the financing patterns of enterprises and the legal and financial environments) across the G7 and EM7 countries.Practical implicationsWe contribute to the empirical literature in the following ways. First, we rely on a wide sample of countries, including both developed and emerging economies. Second, we extend previous research by estimating a GARCH-in-mean model of monthly equity returns in which both realized returns and their conditional volatility are allowed to vary with inflation. Previous articles that studied the relationship between inflation and stock market returns generally sought time-invariant effects of inflation on stock returns.Social implicationsThe paper helps to reconcile the divergent results of previous empirical studies and distinguish between alternative explanations of the relationship between inflation and equity returns.Originality/valueOur study provides an improved comprehension of the ambiguous relationship between inflation, inflation uncertainty and equity returns under various central bank mandates and different levels of central bank independence. The mixed empirical evidence across countries we present provides insights for the macroeconomic models that consider the relationship between uncertainty and macroeconomic performance as a fundamental building block. Therefore, our empirical study calls for further work on the relationship between inflation, inflation uncertainty and equity returns.

Inflation and Economic Activity in Advanced and Emerging Economies

Although the inflation rates have been low in recent years, the uncertainties that put downward pressure on inflation remain the key uncertainties that economies around the world are facing, and they could be unexpectedly persistent. In this paper, we investigate the relationship between nominal uncertainty and macroeconomic performance in the G7 and EM7 countries. We use a bivariate VARMA GARCH-in-Mean asymmetric BEKK model to estimate the response of output growth to inflation uncertainty. We find that inflation uncertainty is persistent in most of the G7 and EM7 countries. The uncertainty surrounding future inflation lowers output growth in most of the G7 countries, however, the effect is mixed in the EM7 countries.

Inflation and economic activity in advanced and emerging economies

AbstractAlthough the inflation rates have been low in recent years, the uncertainties that put downward pressure on inflation remain the key uncertainties that economies around the world are facing, and they could be unexpectedly persistent. In this article, we investigate the relation between nominal uncertainty and macroeconomic performance in the G7 and EM7 countries. We use a bivariate VARMA GARCH‐in‐mean asymmetric BEKK model to estimate the response of output growth to inflation uncertainty. We find that inflation uncertainty is persistent in most of the G7 and EM7 countries. The uncertainty surrounding future inflation lowers output growth in most of the G7 countries; however, the effect is mixed in the EM7 countries.

DOES THE CHOICE OF THE MULTIVARIATE GARCH MODEL ON VOLATILITY SPILLOVERS MATTER? EVIDENCE FROM OIL PRICES AND STOCK MARKETS IN G7 COUNTRIES

In this paper, we employ asymmetric multivariate GARCH approaches to examine their performance on the volatility interactions between global crude oil prices and seven major stock market indices. Insofar as volatility spillover across these markets is a crucial element for portfolio diversification and risk management, we also examine the optimal weights and hedge ratios for oil-stock portfolio holdings with respect to the results. Our findings highlight the superiority of the asymmetric BEKK model and the fact that the choice of the model is of crucial importance given the conflicting results we got. Finally, our results imply that oil assets should be a part of a diversified portfolio of stocks as they increase the risk-adjusted performance of the hedged portfolio.Keywords: Asymmetry, Multivariate GARCH, Stock market, Oil price, Volatility SpilloverJEL Classifications: C32, F3, G15, Q4DOI: https://doi.org/10.32479/ijeep.9469

Money growth variability and output: evidence with credit card-augmented Divisia monetary aggregates

Abstract We reexamine the effects of the variability of money growth on output, raised by Mascaro and Meltzer (1983), in the era of the increasing use of alternative payments, such as credit cards. Using a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model, we find that the volatility of the credit card-augmented Divisia M4 monetary aggregate has a statistically significant negative impact on output from 2006:7 to 2019:3. However, there is no effect of the traditional Divisia M4 growth volatility on real economic activity. We conclude that the balance sheet targeting monetary policies after the financial crisis in 2007–2009 should pay more attention on the broad credit card-augmented Divisia M4 aggregate to address economic and financial stability.

Uncertainty in Euro area and the bond spreads

We investigate potential mean and volatility spillovers among sovereign bond yield spreads for five peripheral countries of the euro area. We focus on Greece, Ireland, Italy, Portugal and Spain during the European sovereign debt crisis. We propose a bootstrap bias-corrected bivariate Vector Autoregressive Moving Average (VARMA), GARCH-in-Mean, asymmetric BEKK model, and find that the level and the volatility of a bond yield spread are mainly dependent on its own past volatility, and thus, its past shocks mainly affect its volatility. Based on our findings, we suggest that the number one priority of the European policymakers be the economic and financial integration of the European peripheral countries into the core.

VOLATILITY SPILLOVER AND DYNAMIC CORRELATION BETWEEN THE CARBON MARKET AND ENERGY MARKETS

This paper studies the volatility spillover and dynamic correlation between EU emission allowance (EUA) prices and energy prices by considering three energy commodities, including oil, gas, and coal. The asymmetric BEKK model is employed for multi-phase analysis of EU ETS, yet only a little empirical evidence backing up the existence of volatility spillover between EU ETS and energy markets, i.e., the establishments of the EU ETS may not effectively limitation and influence energy markets. The time-varying conditional correlation between EUA and each of energy prices is analyzed. The dynamic correlation shows there is a relatively stable, positive correlation between the EUA and Brent oil, natural gas. However, modeling the dynamics correlation also suggests that the correlation between the EUA and the natural gas, coal became weaker and more volatile since second and third phases, especially after the Global Financial Crisis in 2008, which may indicate that the demand reduction in emission allowances caused by the economic slowdown far exceeds the reduction in the annual restraint of EU ETS.

Money Growth Variability and Output: Evidence with Credit Card-Augmented Divisia Monetary Aggregates

We reexamine the effects of the variability of money growth on output, raised by Mascaro and Meltzer (1983), in the era of the increasing use of alternative payments, such as credit cards. Using a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model, we find that the volatility of the credit card-augmented Divisia M4 monetary aggregate has a statistically significant negative impact on output from 2006:7 to 2019:3. However, there is no effect of the traditional Divisia M4 growth volatility on real economic activity. We conclude that the balance sheet targeting monetary policies after the financial crisis in 2007-2009 should pay more attention on the broad credit card-augmented Divisia M4 aggregate to address economic and financial stability.

Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework

ABSTRACTThis article reinvestigates the influence of oil price uncertainty on real economic activity in the United States using a four-variable VAR GARCH-in-mean asymmetric BEKK model. In contrast to previous studies in this area, the analysis focuses on business cycle fluctuations and we control for global supply and demand factors that might affect the real price of oil, its volatility as well as the US economy. We find that – even after accounting for these factors – oil price uncertainty still has a highly significant negative influence on the US business cycle. Our computations show that the effect is economically important during several periods, mostly after a significant variance shift in the mid-1980s. We simultaneously estimate the effect on the global business cycle but find that it is comparatively weak. Finally, significant spillover effects in the GARCH model suggest that oil price volatility is a gauge and channel of transmission of more general macroeconomic shocks and uncertainty. These linkages are particularly strong in case of unexpected bad news.

How do the stock prices of new energy and fossil fuel companies correlate? Evidence from China

This study documents the return and volatility spillover effect between the stock prices of Chinese new energy and fossil fuel companies using the asymmetric BEKK model. Based on daily samples taken from August 30, 2006 to September 11, 2012, the dynamics of new energy/fossil fuel stock spillover are found to be significant and asymmetric. Compared with positive news, negative news about new energy and fossil fuel stock returns leads to larger return changes in their counter assets. News about both new energy and fossil fuel stock returns spills over into variances of their counter assets, and the volatility spillovers depend complexly on the respective signs of the return shocks of each asset. The empirical results demonstrate that new energy and fossil fuel stocks are generally viewed as competing assets, that positive news about new energy stocks could affect the attractiveness of fossil fuel stocks and that new energy stock investment is more speculative and riskier than fossil fuel stock investment. These results have potential implications for asset allocation, financial risk management and energy policymaking.

THE CASE FOR DIVISIA MONEY TARGETING

In this paper we investigate the relationship between money growth uncertainty and the level of economic activity in the United States. We pay explicit attention to the Divisia monetary aggregates. In doing so, we use the new vintage of the data [called MSI (monetary services indices) by the St. Louis Fed], together with the simple sum monetary aggregates, over the period from 1967:1 to 2011:3. In the context of a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model, we show that increased Divisia money growth volatility (irrespective of the level of aggregation and the method of calculation) is associated with a lower average growth rate of real economic activity. However, there are no effects of simple-sum money growth volatility on real economic activity, except with the Sum M1 and perhaps Sum M2M aggregates. We conclude that monetary policies that focus on the Divisia monetary aggregates and target their growth rates will contribute to higher overall economic growth.

Dynamic Conditional Correlations for Asymmetric Processes

The paper develops two Dynamic Conditional Correlation (DCC) models, namely the Wishart DCC (WDCC) model and the Matrix-Exponential Conditional Correlation (MECC) model. The paper applies the WDCC approach to the exponential GARCH (EGARCH) and GJR models to propose asymmetric DCC models. We use the standardized multivariate t-distribution to accommodate heavy-tailed errors. The paper presents an empirical example using the trivariate data of the Nikkei 225, Hang Seng and Straits Times Indices for estimating and forecasting the WDCC-EGARCH and WDCC-GJR models, and compares the performance with the asymmetric BEKK model. The empirical results show that AIC and BIC favour the WDCC-EGARCH model to the WDCC-GJR and asymmetric BEKK models. Moreover, the empirical results indicate that the WDCC-EGARCH-t model produces reasonable VaR threshold forecasts, which are very close to the nominal 1% to 3% values.

Oil price uncertainty and the Canadian economy: Evidence from a VARMA, GARCH-in-Mean, asymmetric BEKK model

In this paper we build on recent work by Elder and Serletis (2010, forthcoming) and Rahman and Serletis (forthcoming) and investigate the relationship between oil price uncertainty and the level of economic activity, using quarterly Canadian data over the period from 1974:1 to 2010:1. In doing so, we use a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model, as detailed in Engle and Kroner (1995), Grier et al. (2004), and Shields et al. (2005). We show that the conditional variance–covariance process underlying output growth and the change in the real price of oil exhibits significant non-diagonality and asymmetry. We also present evidence that increased uncertainty about the change in the real price of oil is associated with a lower average growth rate of real economic activity in Canada, consistent with the results in Elder and Serletis (2010, forthcoming) and Rahman and Serletis (forthcoming) for the United States and Elder and Serletis (2009) for Canada. Our results are robust to alternative measures of the price of oil, alternative measures of the level of economic activity, and alternative data frequencies.

Bivariate Value-at-risk in the emerging Malaysian sectoral markets

This study examines the transmission of price changes and volatility among the Malaysian economic barometer (FTSE Bursa Malaysia Kuala Lumpur Composite Index- FBMKLCI) and four sectoral markets after the Asian financial crisis. The preliminary structural break identification provides an optimal sample size for the cross-markets transmission mechanism analysis. In order to reveal the hidden intention of interactions among the sectoral markets, the pair-wise markets which consist of CI-IND, CI-PLN, CI-PRP and CI-FIN are evaluated using a bivariate asymmetric BEKK model. The major intention of this study focuses on the cross-market hedging and market risk evaluations in terms of shocks and volatility.

Information transmission between small and large stocks in the National Stock Exchange in India: An empirical study

Abstract The study investigates return and volatility spillover effects between large and small stocks in the national stock exchange in India using daily index data on S&P CNX Nifty, CNX Nifty Junior and CNX Midcap. The VAR model together with the variance decomposition (VDC) and the impulse response function (IRF) analysis have been employed to uncover both casual and dynamic relationship between the large stocks and small stocks. The results show that there are very significant return spillovers from the market portfolio of large stocks to the portfolio of small stocks. To investigate the volatility spillover the study has used standard BEKK model and asymmetric BEKK model. Although, based on the standard BEKK model we have observed unidirectional volatility spillovers from the portfolio of large stocks to the portfolio of small stocks, the finding was less reliable. The more reliable finding, which is based on asymmetric BEKK model, is that there is bidirectional volatility spillover between the portfolio of large stocks and the portfolio of small stocks.

Influence of structural changes in transmission of information between stock markets: A European empirical study

The aim of this study is to analyze the influence of structural changes in volatility on the transmission of information. We present empirical evidence on European stock exchange markets based on information from the principal European stock indexes. In order to include structural changes in variance, we followed the [Sansó, A., Aragó, V., Carrión, J.Ll., 2004. Testing for changes in the unconditional variance of financial time series. Revista de Economía Financiera 4, 32–53] modification of the methodology proposed by [Inclan, C., Tiao, G.C., 1994. Use of cumulative sums of squares for retrospective detection of changes of variance. Journal of the American Statistical Association 89, 913–923.], to take into account the problems of kurtosis and heteroskedasticity in the analyzed series. To study the existence of transmission of volatility we used an asymmetric bivariate GARCH model, specifically, the time-varying covariance asymmetric BEKK model [Engle, R.F., Kroner, K.F., 1995. Multivariate simultaneous generalized ARCH. Econometric Theory 11, 122–150]. The most outstanding result is the significance of the variables that represent these changes. When taken into consideration, they influence the scheme of transmission. Structural changes should therefore be incorporated into this type of study.

Influence of Structural Changes in Transmission of Information Between Stock Markets: An European Empirical Study

The aim of this study is to analyze the influence that the structural changes on volatility have on the transmission of information. We realized empirical evidence on European stock exchange markets using the principal European stock indexes: UK, Germany, France, Italy and Spain, for European Union and Swiss as European zone no euro. In order to include structural changes in variance, we followed the modification proposed by Sanso et al. (2002) of the methodology put forward by Inclan and Tiao (1994), to take account the problems of kurtosis and heteroskedasticity of the analyzed series. To study the existence of transmission of volatility we have used an asymmetric Bivariate GARCH model, specifically, the time-varying covariance asymmetric BEKK model (Engle and Kroner, 1995). The most outstanding result is the significance of the variables that represent these changes. Their consideration reduces the volatility persistence and influences the scheme of transmission. So structural changes must be incorporated in these types of studies.