Bidirectional Shock Research Articles

Competency and efficacy of energy futures: empirical investigation from emerging economy

PurposeThe purpose of this study is to analyze the price discovery and market efficiency of energy futures traded in India. The study also examines the volatility spillover effect between the cash and futures markets of energy commodities.Design/methodology/approachThe study uses crude oil and natural gas spot and futures series traded at Multi Commodity Exchange (MCX), India. To evaluate the objectives, the paper employs the cointegration test, causality check, dynamic ordinary least squares (DOLS) method and Baba, Engle, Kraft and Kroner (BEKK) GARCH Model.FindingsThe study supports the long-run association between the selected markets. Unlike natural gas, in the case of crude oil bidirectional, flow of information is observed. The study rejects the unbiasedness and efficient market hypothesis of the energy futures market in India. Further, the study confirms that the selected energy commodities indicate bidirectional shock transmission between their respective cash and futures markets.Practical implicationsThe study will assist the commodity market participants in designing their trading strategy. The volatility signal will be used by investors and portfolio managers for risk management and portfolio adjustment. Regulators will be able to anticipate future spillover and can design policies to strengthen the market.Originality/valueThe paper evaluates the three aspects of the energy futures market, namely price discovery, market efficiency and volatility slipover. To the best of the authors’ knowledge, studies on efficacy and shock transmission in the context of the energy futures market in India are rare. Further, the study also contributes by investigating the price discovery process of the energy futures market.

Exploring Volatility Spillover Dynamics between Emerging South Asian Stock Markets and the U.S. Market: Empirical Insights from the M-GARCH-BEKK Framework

Abstract: This study investigates the volatility spillover between emerging South Asian equity markets and developed U.S. market. Specifically, the study examines the entire sample period and three sub-periods: pre-crisis, crisis, and post-Global Financial Crisis (GFC) periods in the emerging markets of Pakistan, India, and Sri Lanka, as well as the U.S. as developed stock market. The study analyses both unidirectional and bidirectional shock and volatility spillover among the markets to determine the direction of risk transmissions. The analysis utilizes a multivariate GARCH-BEKK model. The results indicate that volatility transmissions increased due to the GFC. Furthermore, the South Asian emerging markets exhibit shock and volatility spillover during the crisis period compared to the pre- and post-crisis periods. Additionally, the patterns of risk transmission were time-varying. These findings support the notion that market volatility increases during turbulent events, such as the Global Financial Crisis. The implications of these results are important for policymakers, investors, and researchers interested in international diversification and market efficiency within the studied markets especially during turbulent periods.

Volatility Spillover Among the Sustainable Indices of Emerging Markets: Evidence from Pre-COVID and COVID Periods

This study investigated the dynamic volatility spillover among the sustainable stock indices of emerging markets such as China, India, South Korea, Thailand, Indonesia and Malaysia. To analyse the return, shock and volatility spillover among these emerging sustainable indices (SIs) during the pre-COVID and COVID periods, the BEKK model has been used. The study also estimated the optimal portfolio weights. The results indicate the presence of return and volatility spillover among the SIs during pre-COVID and COVID periods. The sustainable index of China has been dominant in impacting the return of the two major markets, India and South Korea. The SIs of markets have been significantly affected by their own shock and volatility during both periods. The bi-directional shock spillover effect exists among some pairs of SIs. The study also found that volatility spillover is more during the COVID-19 period. Surprisingly, this research discovered that Malaysia’s sustainable index has impacted the volatility of other major Asian markets during the crisis period. The portfolio weights also favour investments in the sustainable index of Malaysia both in pre-COVID and COVID phases. The study advises the stakeholders to carefully watch the behaviour of SIs to diversify the risk.

Crude oil futures prices and foreign exchange markets

ABSTRACTWe apply a time-varying parameter VAR (TVP-VAR) extended joint connectedness approach, in addition to the generalized connectedness approach, to understand the connectedness of crude oil futures price and exchange rates of major oil-dependent countries. We find time-varying nature of pair-wise and total connectedness that are usually elevated during events such as COVID-19, Brexit, European sovereign debt crisis and global financial crisis. Both joint and generalized connectedness approaches confirm that Japanese Yen and Russian Ruble are the leading net receiver of the shocks, though the two approaches provide mixed results for some other currencies. Moreover, there is strong evidence of time-varying and bi-directional shock transmissions between oil and foreign exchange markets. We also show that oil price volatility and gold price have predictive power on the connectedness. Lastly, we analyse the policy and portfolio implications.

Time varying connectedness between foreign exchange markets and crude oil futures prices

The relationship between crude oil futures and exchange rates has been the subject of several research studies. Through the utilization of a TVP-VAR (time-varying parameter VAR) extended joint connectedness methodology and the generalized connectedness technique to investigate the interconnectivity of oil futures prices of key oil-dependent nations and exchange rates, we contribute to the existing body of knowledge. Our findings indicate a time-varying nature of overall and pairwise connections, which typically intensifies during various periods such as the COVID-19 pandemic, Brexit, and the European sovereign debt crisis. The Japanese Yen and Russian Ruble appear as the primary recipients of net shocks, as suggested by both the generalized and joint connectedness methodologies. For other nations, similar methods yield conflicting results. Furthermore, there is clear evidence of time-dependent and bidirectional shock transmissions between the oil and foreign exchange markets. Our research provides valuable policy recommendations for stakeholders and diverse investors.

Cryptocurrencies Intraday High-Frequency Volatility Spillover Effects Using Univariate and Multivariate GARCH Models

Over the past years, cryptocurrencies have drawn substantial attention from the media while attracting many investors. Since then, cryptocurrency prices have experienced high fluctuations. In this paper, we forecast the high-frequency 1 min volatility of four widely traded cryptocurrencies, i.e., Bitcoin, Ethereum, Litecoin, and Ripple, by modeling volatility to select the best model. We propose various generalized autoregressive conditional heteroscedasticity (GARCH) family models, including an sGARCH(1,1), GJR-GARCH(1,1), TGARCH(1,1), EGARCH(1,1), which we compare to a multivariate DCC-GARCH(1,1) model to forecast the intraday price volatility. We evaluate the results under the MSE and MAE loss functions. Statistical analyses demonstrate that the univariate GJR-GARCH model (1,1) shows a superior predictive accuracy at all horizons, followed closely by the TGARCH(1,1), which are the best models for modeling the volatility process on out-of-sample data and have more accurately indicated the asymmetric incidence of shocks in the cryptocurrency market. The study determines evidence of bidirectional shock transmission effects between the cryptocurrency pairs. Hence, the multivariate DCC-GARCH model can identify the cryptocurrency market’s cross-market volatility shocks and volatility transmissions. In addition, we introduce a comparison of the models using the improvement rate (IR) metric for comparing models. As a result, we compare the different forecasting models to the chosen benchmarking model to confirm the improvement trends for the model’s predictions.

Volatility Behaviour of Bitcoin as a Digital Asset

The objective of this study is to use the South African financial markets (Johannesburg Stock Exchange or JSE and USD/ZAR) as a case study to understand the volatility spillover dynamics of Bitcoin as a digital asset. Methodologically, the study applies the exponential generalized autoregressive conditional heteroskedastic (EGARCH) model, followed by a robustness check by applying the time-varying conditional correlation multivariate GARCH (VCC-MGARCH) model. The study utilizes the data set for the period 2011 to 2019, a period before the COVID‑19 pandemic. The research outcome revealed three interesting observations. First, Bitcoin and the South African stock market are independent of each other. Second, there is a bidirectional shock transmission between Bitcoin and USD/ZAR in the mean returns only, but not variance. Lastly, results confirm the existence of a bidirectional volatility spillover in both the mean and variance between the JSE stock market and the USD/ZAR market. The study outcome should enlighten investors who may want to consider Bitcoin as a diversifier in their investment and portfolio strategies.

Shocks and volatility transmission between oil price and Nigeria's exchange rate.

The study examined shock and volatility transmission between oil price and exchange rate markets using daily data covering the period from 23rd October 2009 to 30th November 2020. The contributions of the paper include (i) implementation of VAR-AGARCH model to capture spillover effect of shock and volatility; (ii) examining the nature of shock impact in oil price and exchange rate market; (iii) adopting of two measured of oil price (WTI and Brent); (iv) employing two measures of the exchange rate (USD/Naira and effective/Naira). The study revealed that past own shocks and volatilities significantly contribute to current volatilities in exchange rate and oil price markets. Also, there is bidirectional shock and volatility spillover between the exchange rate (USD/Naira and effective/Naira) and WTI oil price markets. There were bidirectional shock and volatility spillover between USD/Naira and Brent oil price and unidirectional shock and volatility from Brent oil price to effective exchange rate market. We found asymmetric shocks impacting exchange rates and WTI oil price while symmetric shock was observed in Brent oil price. Including innovation in oil price is essential in exchange rate policy formulation and modelling exchange rate shock and volatility.

Volatility transmissions across international oil market, commodity futures and stock markets: Empirical evidence from China

This paper uses a trivariate VAR-BEKK-GARCH model to investigate the dynamic relationship among the Chinese stock market, commodity markets and global oil price. We find significant unidirectional return spillover effect from oil market to stock market, suggesting a strong dependence of the Chinese stock market on the oil market. Our results show significant unidirectional return interaction from the Chinese stock market and global oil market to key commodities indicators in China. In particular, significant return contagions from the Chinese stock market to copper and aluminium futures and from oil market to silver, copper and aluminium markets are observed. Non-existence of return spillovers between gold and stock (oil) suggests the safe-haven role of the gold. In terms of the volatility spillovers, we find bidirectional shocks spillovers between oil and stock markets but unidirectional volatility spillovers from the oil market to the Chinese stock market. For commodities, we show evidence of strong uni-directional shock and volatility spillovers from stock market or oil market to commodities market. However there are no spillover effects from all the commodity markets to either stock market or oil market, implying potential diversification benefits from the Chinese commodity markets. Finally, the paper highlights the results which potentially have important implications for portfolio management and hedge strategies. • We investigate dynamic relationships between Chinese stock-market, commodity markets and global oil prices • We find a strong dependence of the Chinese stock market on the oil market. • Strong bidirectional shock spillovers between oil and stock markets is reported • Significant contagion from the Chinese stock market to copper and aluminium futures are observed • Potential diversification benefits from China’s commodity markets are found to support risk and portfolio management.

Linkages among energy price, exchange rates and stock markets: Evidence from emerging African economies

ABSTRACTThis study examines the dynamic links among oil prices, foreign exchange rates and stock markets in emerging Africa using recent 10 years data and VAR-BEKK-GARCH forecasting framework. We find evidence of significant return and volatility interactions in oil return, exchange rates and stock markets. The non-existence of long-term cointegration equilibrium implies potential diversification benefit in the long run. Autoregressive characteristics for most African foreign currencies and stock markets indicate markets’ own predictability. We see that high oil return leads to an appreciation of Botswana pula, Nigerian dollar and Zambian kwacha, depreciation of Egyptian pound and boost the stock markets of Egypt, Kenya, Nigeria and Tunisia. From the conditional variance equation, we observe significant statistical evidence of local spillover effects from oil to financial markets. Strong bi-directional shock and volatility spillovers between oil and most African exchange rates are reported. Significant shock and volatility spillovers between oil and stock markets are found in some of the African countries. We conduct portfolio optimization analyses as part of the financial risk management and risk mitigation strategies. Policy wise, leaders should promote the development of financial derivative instruments since foreign exchange rates are used as a tool to absorb oil and other external shocks.

Volatility spillover effects in leading cryptocurrencies: A BEKK-MGARCH analysis

Through the application of three pair-wise bivariate BEKK models, this paper examines the conditional volatility dynamics along with interlinkages and conditional correlations between three pairs of cryptocurrencies, namely Bitcoin-Ether, Bitcoin-Litecoin, and Ether-Litecoin. While cryptocurrency price volatility is found to be dependent on its own past shocks and past volatility, we find evidence of bi-directional shock transmission effects between Bitcoin and both Ether and Litecoin, and uni-directional shock spillovers from Ether to Litecoin. Finally, we identify bi-directional volatility spillover effects between all the three pairs and provide evidence that time-varying conditional correlations exist and are mostly positive.

Exchange rate volatility in West African countries: is there a shred of Spillover?

PurposeThe purpose of this paper is to evaluate selected West African currencies/US dollar exchange rates for the evidence of volatility spillover. Specifically, the paper examines West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD, for any evidence of shock and volatility spillover.Design/methodology/approachThe author employs multivariate GARCH (1,1)–BEKK model which enables the evaluation of the interaction within the volatility of two or more series because of its capability to detect volatility spillover among time series observations, as well as the persistence of volatility within each series.FindingsThe major findings of this study are as follows: there is evidence of volatility clustering in West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD. There is evidence of bi-directional shock and volatility spillover between the Nigerian naira and West African CFA franc/USD exchange rates, and uni-directional shock spillover from the Gambian dalasi to the West African CFA franc/USD exchange rates. There is, however, no evidence of exchange rate shock and volatility spillover between Nigerian naira and Gambian dalasi.Originality/valueAlthough considerable literature exists on the volatility of exchange rate in West Africa and comparative analysis of exchange rates volatility in few countries of West Africa, there is absence of empirical studies on exchange rate volatility spillover among countries in the region. Since containing exchange rate volatility is one of the major objectives of monetary policy, understanding the nature and direction of exchange rate volatility spillover would propel formulation exchange rate policies that would minimise exchange rate uncertainty and entrench sustainable development. In addition, the nature of exchange rate volatility spillover between West African countries would provide basis for international traders and foreign portfolio investors to develop effective strategies for hedging against exchange rate shocks that are propagated across countries by designing appropriate risk management techniques.

Return, volatility and shock spillovers of Bitcoin with energy and technology companies

We employ an asymmetric multivariate VAR-GARCH model to study spillover effects between Bitcoin and energy and technology companies. We find unilateral return and volatility spillovers and bidirectional shock influences and demonstrate portfolio management implications of dynamic conditional correlations.

Volatility Spillover Effects in Leading Cryptocurrencies: A BEKK-MGARCH Analysis

Through the application of three pair-wise bivariate BEKK models, this paper examines the conditional volatility dynamics along with interlinkages and conditional correlations between three pairs of cryptocurrencies, namely Bitcoin, Ether and Litecoin. While cryptocurrency price volatility is found to be dependent on its own past shocks and past volatility, we find evidence of bi-directional shock transmission effects between Bitcoin and both Ether and Litecoin, and uni-directional shock spillovers from Litecoin to Ether. Finally, we identify bi-directional volatility spillover effects between all the three pairs provide evidence that time-varying conditional correlations exist and are mostly positive.

Shock Dependence and Volatility Transmission Between Crude Oil and Stock Markets: Evidence from Pakistan

This paper investigates shock dependence and volatility transmission between the crude oil and equity markets, based on crude oil returns and stock index returns for the period 2 January 2009 to 27 January 2014. We employ the bivariate BEKK-GARCH (1, 1) model developed by Engle and Kroner (1995) as well as the Engle and Granger (1987) cointegration and unit root tests. These parameterization tools are more flexible and innovative than other specifications, which often give counter-intuitive results. The results of the cointegration test reject the notion of a long-run relationship between the crude oil market and stock market. The results of the BEKK-GARCH model suggest that shocks and volatility created in the oil market have a significant effect on the Pakistan Stock Exchange. They also reveal bidirectional shock persistence and a unidirectional volatility spillover between crude oil prices and Pakistani equity prices. These empirical findings can help predict price movements in each market efficiently. The empirical results are also important for policymakers involved in shock prevention and for portfolio managers seeking optimal portfolio allocation.

Modeling oil price–US stock nexus: A VARMA–BEKK–AGARCH approach

This study adds to the existing literature on oil price–US stock nexus in three ways. First, it employs the VARMA–AGARCH model developed by McAleer et al. (2009) within the context of BEKK framework using West Texas Intermediate (WTI) and Brent as proxies for oil market and S&P stocks as a proxy for US stock market. Secondly, it modifies the model to include endogenously determined structural break using the general structure for analyzing breaks with unit roots in Perron (2006). Third, it uses the adopted model to compute optimal portfolio weight and hedge ratios between oil price and US stocks using different sample data based on the break date. On average, our empirical evidence suggests a significant positive return spillover from US stock market to oil market and bi-directional shock spillovers between the two markets. In addition, there is significant own asymmetric shock effect in both markets while volatility spillover from oil market to stock market became pronounced after the break which coincides with the period of global economic slowdown. Similarly, the results of portfolio management differ across the sample data. More importantly, we find that ignoring structural break when it exists may exaggerate hedging effectiveness.

Volatility Interactions among India and US Stock Markets

The study examines the return and volatility spillover among BSE and DJIA of India and US Stock Markets respectively. It employed GARCH-BEKK model to examine the relationship. The period of study is from January 2, 2012 to April 4, 2014. We find evidences of bidirectional shock and volatility interactions among the stock markets. The results indicate that DJIA exercises more influence on BSE in terms of shocks and volatility transmission. The overall persistence of volatility is highest in US stock market.

English

The direction of volatility transmission between stock and foreign exchange markets is important for hedging strategy, portfolio management and financial market regulation. This paper examines volatility transmission between stock and foreign exchange markets by applying the multivariate GARCH model in the BEKK framework to Nigerian stock returns and the Naira/USD exchange rate data from January 1996 to March 2013. Results of the empirical analysis show evidence of volatility clustering in both stock and foreign exchange markets. The results also show bi-directional shock transmission between stock and foreign exchange markets, suggesting that information flow in the foreign exchange market impact the stock market and vice versa. Finally, the results show evidence of a uni-directional volatility transmission from the foreign exchange market to the stock market. The implication is for investors vigilantly to monitor and dissect all information in the two markets as part of their investment strategy.

Price Discovery and Transmission Mechanism between CDS and FX markets

This study investigated the relationship between the CDS (credit default swap) market with the FX spot (FX swap) market, including the period of recent global financial crisis. A measure for market efficiency is the condition that the derivative markets dominate the asset market in price discovery. In our case, however, FX market should be leading the CDS market. We found FX (spot and Derivatives) market has co-integration relationship with CDS market. Looking at Gonzalo Granger (GG) and Hasbrouck's price discovery measure, we found the FX spot and derivatives market dominated CDS market in price discovery. This study has also examined the direction of shock spillover and volatility transmission between Korean CDS spread and Foreign exchange spot (FX swap) markets using the VECM bivariate GARCH approach. Our evidence suggested the presence of bi-directional shock volatility and volatility transmission between the CDS market and FX spot market partially exist. However, volatility spillover effects from CDS market to FX Swap market are stronger than in the reverse direction during the global financial crisis, indicating that the CDS spread signaling sovereign risk play a more important role in influencing the volatility of FX derivatives market. There are some particular features in FX market. The volatility and shock of CIP deviations reflecting arbitrage opportunities in FX swap market are influenced by those of CDS spread in tranquil period prior to Lehman failure. But after Lehman failure CDS played a crucial role in signaling credit risk in FX derivatives market. We found that higher liquidity and trading volume of market matters more in price discovery and information transmission.

Stock Returns and Exchange Rate Volatility Spillovers in the MENA Region

In this article, we examine the presence of volatility spillovers between nominal exchange rates and stock returns in three MENA countries: Egypt, Morocco and Turkey. The multivariate GARCH model we use does not produce evidence of cross-market effects for the general stock indices returns. Nevertheless, bidirectional shock and volatility spillovers between exchange rates and stock returns exist at the industry sector level. These findings are more pronounced in Egypt and Turkey. The different results are due to the different exchange rate regimes/policies adopted by the three countries. While exchange rates in Egypt and Turkey were allowed to float, Morocco followed a more tightly managed exchange rate regime.