Evidence Of Volatility Spillovers Research Articles

Foreign Institutional Investment And The Indian Stock Market

This article analyzes the impact of foreign institutional investment (FII) on the Indian stock market. The authors find that FII positively impacts the Indian stock market returns and the Bombay stock exchange turnover value. Further, the authors, find that FII “Granger causes” the stock market value and the turnover value to increase. The study employs GARCH and GJR-GARCH analyses in detail and concludes that, in spite of those influences, there is no evidence of volatility spillover from FII to the Indian stock markets.

Modeling the relationship between European carbon permits and certified emission reductions

Abstract Recent years have seen an expansion of carbon markets around the world as various policymakers attempt to reduce CO2 emissions. This paper considers two of the major types of carbon permits: European Union Allowances (EUAs, arising from the European Union Emissions Trading Scheme, EU ETS) and certified emissions reductions (CERs, arising from agreements made under the Kyoto Protocol). The rules of the EU ETS allow for some use of CERs in place of EUAs by EU firms, but this substitutability is only partial. Allowing for carbon permits from different sources to substitute for one another should help achieve CO2 emissions reductions at least cost. Understanding the degree and nature of linkages (if any) between the markets for EUAs and CER is, thus, an important policy issue. In this paper, we jointly model the spot and future prices of an EUA along with the price of a CER using flexible multivariate time series methods which allow for time-variation in parameters. We find evidence of contemporaneous causality between these three variables with the EUA futures price playing the dominant role in driving this relationship. We also document time-variation in this relationship which is associated with macroeconomic events such as the financial crisis of late 2008 and early 2009. We find very little evidence of volatility spillovers or of Granger causality among any of the variables. We discuss how these empirical findings are consistent with markets which are loosely linked, but are not tightly linked as would be found for perfectly substitutable assets in efficient financial markets.

On detection of volatility spillovers in overlapping stock markets

Abstract This paper applies a recently proposed structural vector autoregressive model identification method to an established, previously unidentified theoretical model of stock market volatility spillovers. The structural model is identified and can be estimated with the method of maximum likelihood. Volatility spillovers can then be tested with the standard likelihood ratio test. This way our test, unlike the majority of the existing volatility spillover tests, has its foundations firmly in the economic theory. Our test is developed for fully overlapping stock markets. The empirical application of the paper considers stock markets of the eurozone in the years 2010–2011. Evidence of volatility spillovers is found.

Do price limits hurt the market?

Under an artificial stock market composed of bounded-rational and heterogeneous traders, this paper examines whether or not price limits generate the negative effects on the market. Through testing the volatility spillover hypothesis, the delayed price discovery hypothesis, and the trading interference hypothesis, we find that no evidence of volatility spillover is observed. However, the phenomena of delayed price discovery and trading interference indeed exist, and their significance depends on the level of the price limits.

Conditional correlations and volatility spillovers between crude oil and stock index returns

This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 stock index returns, are analysed using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti, and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC.

On Detection of Volatility Spillovers in Simultaneously Open Stock Markets

Empirical research confirms the existence of volatility spillovers across national stock markets. However, the models in use are mostly statistical ones. Much less is known about the actual transmission mechanisms; theoretical literature is scarce, and so is empirical work trying to estimate specific theoretical models. Some economic theory founded tests for such spillovers have been developed for non-overlapping markets; this institutional set up provides a way around the problems of estimating a system of simultaneous equations. However, volatility spillovers across overlapping markets might be as important a phenomenon as across non-overlapping markets. Building on recent advances in econometrics of identifying structural vector autoregressive models, this paper proposes a way to estimate an existing signal-extraction model that explains volatility spillovers across simultaneously open stock markets. Furthermore, a new empirical test for detection of such spillovers is derived. As an empirical application, the theoretical model is fitted to daily data of eurozone stock markets in years 2010--2011. Evidence of volatility spillovers across the countries is found.

The effects of volatility spillover in the US basis swap markets

This paper examines time series properties of the swap spreads in three segments of the US dollar interest rate swaps market. Specifically, the relationship between the swap spreads in US dollar fixed-for-floating Interest Rate Swaps (IRS), Treasury bill versus LIBOR basis swaps and commercial paper versus LIBOR basis swaps are analysed. Tests for evidence of volatility spillover among these segments are conducted. Variations of several models, including VAR/VECM, GARCH (1, 1) EGARCH and GJR-GARCH are used in this study. Evidence of interdependencies and volatility spillover is found between these markets. Using the GJR-GARCH model, it is found that the spillover is asymmetric.

Volatility spillovers and dynamic conditional correlation between crude oil and stock market returns

This paper investigates the volatility spillover and the dynamic correlation between crude oil and stock index returns. Monthly returns from January 1997 to December 2010 of the crude oil, oil-importing and oil-exporting stock indices are analysed using three multivariate GARCH specifications specifically the BEKK-GARCH model, the CCC-GARCH model and the DCC-GARCH model. Based on the BEKK-GARCH estimation results, we find strong evidence of volatility spillovers from crude oil to all oil-importing and oil-exporting stock markets. Based on the CCC model, the estimates of conditional correlations for returns across crude oil and market indexes are very low, which means the conditional shocks are correlated only in the same market. Though, the DCC estimates of the conditional correlations are always significant. This finding suggests that the assumption of constant conditional correlations is not supported empirically. The time varying correlations of crude oil and stocks returns do not differ for oil-importer or oil-exporter countries. Oil price shocks seem to have a significant impact on the relationship between oil and stock indices returns in world turmoil periods. The extent of the effect of the 2008 stock market crash on the correlation coefficients is significantly important than those of the previous financial crises.

Risk Transmission Between Latin America Stock Markets and the US: Impacts of the 2007/2008 Crisis

The aim of this paper is to investigate whether the US subprime financial turmoil has had any statistically significant effect on the conditional volatility of stock prices in Latin America for which the BEKK methodology is adopted, developed by Engle and Kroner (1995). The t-student distribution is employed as it can provide a best fit for financial data. In order to do this study, we will investigate four Latin America emerging capital markets (Brazil, Argentina, Chile and Mexico) and the United States, considering the period of the recent financial crisis of 2007/2008, analyzing before, during and after the crisis period. Our results show that before the crisis there is no evidence of volatility spillovers from the North American stock market to Latin American ones. During the crisis, there is evidence of volatility spillover effects on some countries. Brazil and Chile affect the US volatility and Argentina, Chile and Mexico are affected by the US’s. After the crisis, the volatility of all Latin American stock markets affect and are affected by the US market. These results show an increase in spillover effects from a shock to US stock market to Latin American countries after the 2007/2008 financial crisis.

Information dynamics effects from major world markets to SAARC nations

This paper investigates the impact of major world equity markets on four founding countries of the South Asian Association for Regional Cooperation (SAARC). With a population of 1.47 billion, SAARC is the largest regional organization in the world. However, the issue of global integration of equity markets of the SAARC nations has largely been ignored. This study fills this important gap, adding results towards the ongoing debate concerning the issue of global market integration. After the onset of the financial crises of 2008, this issue is imperative. VAR analysis is used to determine whether there is any dependency of SAARC return on the performance of world equity markets. Further, GARCH-in-mean modeling is used to determine whether there is any evidence of Volatility spillover. It is found that volatility in major world markets do not impact returns in SAARC nation, but ample evidence of volatility spillover is found for India, Bangladesh and Sri Lanka. Similar results are not obtained for Pakistan.

Derivatives trading, volatility spillover, and regulation: Evidence from the Korean securities markets

AbstractUnlike the U.S. and Japanese securities markets, we find new evidence of volatility spillover between index stocks and non‐index stocks following the introductions of index derivatives trading in the Korean securities markets. We further find that the degree of volatility spillover is closely related to the level of market deregulation; significant return volatility spills over from non‐index to index stocks during deregulation period but in the opposite direction during post‐deregulation period. Our empirical results show that the former volatility spillover from non‐index to index stocks can be explained by the transitory contagion effect associated with the 1997 Korean financial crisis and the subsequent market deregulation, whereas the latter volatility spillover from index to non‐index stocks is attributed to the permanent information spillover effect. This latter evidence suggests that the information regarding investors' expectations on the future common market factors is first reflected into the return volatility of index stocks and then transferred to the trading of non‐index stocks against which derivatives are not traded. Our results are robust to different estimation and sample construction methods. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:563–597, 2009

Local and spillover shocks in implied market volatility: evidence for the U.S. and Germany

The occurrence and the transmission of large shocks in international equity markets is of essential interest to the study of market integration and financial crises. To this aim, implied market volatility allows to monitor ex ante risk expectations in different markets. We investigate the behavior of implied market volatility indices for the U.S. and Germany under a straightforward mean reversion model that allows for Poisson jumps. Our empirical findings for daily data in the period 1992 to 2002 provide evidence of significant positive jumps, i.e. situations of market stress with positive unexpected changes in ex ante risk assessments. Jump events are mostly country-specific with some evidence of volatility spillover. Analysis of public information around jump dates indicates two basic categories of events. First, crisis events occurring under spillover shocks. Second, information release events which include three subcategories, namely—worries about as well as actual—unexpected releases concerning U.S. monetary policy, macroeconomic data and corporate profits. Additionally, foreign exchange market movements may cause volatility shocks.

Local and Spillover Shocks in Implied Market Volatility: Evidence for the U.S. and Germany

The occurrence and the transmission of large shocks in international equity markets is of essential interest to the study of market integration and financial crises. To this aim, implied market volatility allows to monitor ex-ante risk expectations in different markets. We investigate the behavior of implied market volatility indices for the U.S. and Germany under a straightforward mean reversion model that allows for Poisson jumps. Our empirical findings for daily data in the period 1992 to 2002 provide evidence of significant positive jumps, i.e. situations of market stress with positive unexpected changes in ex-ante risk assessments. Jump events are mostly country-specific with some evidence of volatility spillover. Analysis of public information around jump dates indicates two basic categories of events. First, crisis events occurring under spillover shocks. Second, information release events which include three subcategories, namely---worries about as well as actual---unexpected releases concerning U.S. monetary policy, macroeconomic data and corporate profits or single profit warnings. Additionally, foreign exchange market movements may cause volatility shocks.

International transmission of information: evidence from the Euroyen and Eurodollar futures markets

This paper examines the information transmission between Japan and the US by using the Tokyo Euroyen and Chicago Eurodollar futures. These two interest rate futures markets provide a better understanding of international information transmission than stock markets, which have been shown to exhibit nonsynchronous trading and market segmentation. The results show that traders in Tokyo (Chicago) use information that is revealed overnight in Chicago (Tokyo). The bivariate EGARCH-t model provides no evidence of volatility spillovers in either direction, suggesting that the opening price rapidly reflects foreign information. The overall results support the hypothesis that the domestic market efficiently adjusts to foreign news. The results are also broadly consistent with the covered interest arbitrage effects.

Information Flows Between Eurodollar Spot and Futures Markets

The pattern of information flows between Eurodollar spot and futures markets is examined using a robust two-step procedure. This procedure allows for conditional mean and variance dynamics as well as conditional heteroskedasticity. We find spot rates affect futures data and vice versa. In addition, there is evidence of volatility spillover between the two markets. Our results also indicate that information conveyed by data on futures tends to have a more persistent impact on both the mean and volatility of cash market price movements than the other way around

Hourly volatility spillovers between international equity markets

This paper examines the timing of mean and volatility spillovers between New York and London equity markets. Using an ARCH model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so. The most significant effects surround the movement of share prices around the New York opening, but these results are not strong. Several new ARCH models are estimated including an asymmetric or ‘leverage’ model and a non-linear model which allows big shocks to have a different impact from small shocks.