Global Volatility Research Articles

(Macroprudential Response to Increased Global Market Volatility)

Korean Abstract: 2008년 9월 글로벌 금융위기 이후 저금리가 장기간 지속되는 과정에서 국제금융시장 가격변수들의 변동성도 낮게 유지되었다. 낮은 변동성의 지속은 리스크 프리미엄의 하락을 초래하고, 이로 인해 글로벌 투자자들이 위험을 감수하는 행위가 증가한다. 2009년 이후 신흥국으로 대규모 자금이 유입되는 국제자본 흐름의 큰 변화가 발생하였는데, 이는 글로벌 투자자들의 위험자산에 대한 선호도가 높아짐에 따라 신용위험이 상대적으로 높은 신흥국에 대한 투자가 증가한데 기인한다. 신흥국으로의 자본유입 증가는 국내신용 증가 및 자산가격 왜곡 등 금융시스템의 취약성을 증대시킨다. 이는 향후 자본유출 압력이 강해지면 국내 자산가격의 하락 및 경기위축 등이 초래될 수 있음을 시사한다. 2015년 말 이후 미국 연방준비제도이사회(Federal Reserve Board)가 통화정책을 정상화하면서 자산가격의 변동성과 리스크 프리미엄이 다시 상승(정상화) 할 경우 우리나라를 포함한 신흥국으로 유입된 외국인자금에 대한 유출압력이 증가할 것으로 예상된다. 이에 따라 본 보고서는 국제금융시장의 변동성과 자본 흐름의 변화를 살펴보고, 신흥국 자금유출입의 변동요인을 분석하였다. 또한 신흥국 및 우리나라의 자본이동관리정책을 살펴보았으며, 새로운 정책대응수단으로 자산지준제도의 효과를 분석하였다.English Abstract: Volatilities of price indicators have remained extremely stable during the period of low interest rates since the Global Financial Crisis (GFC) of September 2009. Low volatility pushes down the risk premium which could cause global investors’ risk appetite to increase. There has been a big change in global liquidity flows since 2009. Emerging market economies (EMEs), with relatively high credit risk, received huge capital inflows backed up by the increased risk appetite of global investors. US Federal Reserve is now trying to normalize its monetary policy by increasing the policy rate tied at zero low bound for about seven years. This will bring asset price volatility and risk premiums to normalize. We remain concerned about the downside risk to the capital outflows from EMEs, including Korea. And it may well potentially cause a decrease in asset price and a growth contraction in EMEs. Accordingly, we provide an overview of the volatility of financial market and new trends in capital flows, and identify the determinants of capital flows to/from EMEs. We also review the use of capital flow management policies in EMEs including Korea, and examine the effectiveness of Asset？Based Reserve Requirements (ABRR) as an alternative macro-prudential policy measure to manage capital flows.

Common trends in global volatility

This paper investigates the long-term patterns in global foreign exchange, equity and bond markets in three different trading zones, namely, Japan, Europe and the United States. Recent advances in the measurement of volatility from high-frequency data are used together with the concepts of fractional integration and cointegration. The specific objective is to consider whether there are common trends that drive volatility in the global marketplace. This so-called commonality in volatility hypothesis is formulated using a cofractional model. The results confirm that volatility in all three financial asset markets, across all three trading zones share a single common trend which lends itself to interpretation as a global news stream.

Multinational Subsidiary Performance: Evidence from the Ghanaian Banking Sector

The global economic volatility has given rise to diverse firm operational strategies including internationalization through subsidiary establishment. This has aroused the interest of scholars to the study of multinational firm performance. The study seeks to ascertain the factors that contribute to the performance of multinational subsidiary banks in Ghana. Using an unbalanced random effects panel regression estimation following the Hausman specification test, the study found that increasing bank size does not necessarily lead to performance. As it stands, the Multinational Subsidiary (MNS) banks under perform as they increase in size. It was further noted that the banks are inefficient and so shift their costs and risks to customers in the form of high interest charges on credit. Notwithstanding, it appears that older MNSs perform better than the relatively younger ones. The study found that leadership origin does not have any significant impact on bank performance. Evidence was, however, found about the significant influence of the host country economic conditions on MNS performance.

Macro-Prudential Response to Increased Global Market Volatility

Volatilities of price indicators have remained extremely stabilized during the period of low interest rates since the Global Financial Crisis (GFC) of September 2009. Low volatility pushes down risk premium. That could lead global investors’ risk appetite to increase. There has been a big change in global liquidity flows since 2009. Emerging market economies (EMEs), with relatively high credit risk, received a huge capital inflows backed up by the increased risk appetite of global investors.US Federal Reserve is now trying to normalize its monetary policy by increasing the policy rate tied at zero low bound for about seven years. This will bring asset price volatility and risk premium to normalize too. We remain concerned about the downside risk to the capital outflows from EMEs, including Korea. And it may well potentially cause a decrease in asset price and a growth contraction in EMEs. Accordingly, we overview volatility of financial market and new trends in capital flows, and identify the determinants of capital flows to/from EMEs. We also review the use of capital flow management policies in EMEs including Korea, and examine the effectiveness of Asset? Based Reserve Requirements (ABRR) as an alternative macro-prudential policy measure to manage capital flows.

Information Shares in Stationary Time Series and Global Volatility Discovery

Standard price discovery measures, particularly information shares, rely on the concept of co-integration for non-stationary time series. For the definition of information shares, the existence of a permanent impact of innovations is crucial, as these shares measure the relative contribution of different markets to this permanent impact. For stationary time series such as interest rates, CDS prices, or volatilities, a permanent impact however does not occur and thus the concept fails and lacks an interpretation. In this paper we extend the concept of information shares to the case of stationary time series. We suggest a price discovery measure based on the well-known variance decomposition for stationary time series, aiming to be equivalent to Hasbrouck's information share. We show that this new price discovery measure converges to the standard information share in the border case of non-stationarity.

Causality between sovereign, quasi-sovereign credit risks and global volatility: The case of Russia

The article examines causalities between sovereign, most important quasi-sovereign CDS prices (Gazprom, VTB, Sberbank) for Russia and the global volatility factor embedded in the VIX index dynamics. The analysis refers to the post-bailout period in this major emerging economy (May 2009–July 2013). The causalities are assessed in the time (the Hong test) and frequency (the Breitung–Candelon test) domains. The VIX index dynamics has a strong impact on all Russian CDS, but also receives a non-negligible feedback from them. The sovereign and quasi-sovereign CDS prices exhibit a strong causal connectedness in both domains, with the impact of the quasi-sovereigns (in particular, that of banks) getting more pronounced in the longer run, i.e. over longer time horizons and at lower frequencies. High foreign exposure of the quasi-sovereigns, explicit/implicit public guarantees and the holdings of the Russian sovereign debt on their balances underlie the causalities. Given the systemic role that the government-controlled entities play in the Russian economy, this may lead to the “too big to save” effect with negative implications for financial and fiscal stability.

Are there Swift Transitions in the Smooth Transition Regressions of the Exchange Rate Volatility of Dollarized Versus Non-Dollarized Economies?

The aim of this paper is to examine the nature of the transitions in the exchange rate volatility of dollarized and non-dollarized economies as a result of global financial stress. Smooth transition regression is applied to the daily data of 16 countries. In the non-linear regime, exchange rate volatility of most non-dollarized economies increases with the increase in global financial stress volatility. On average, there are abrupt transitions in the exchange rate volatility of dollarized economies. Some of the results imply that anchoring a currency to the US dollars requires fast policy reactions, particularly at times of US financial crisis.

Stability in the storm: Is China the perpetrator of global volatility, or a victim?

As financial markets stagger from announcement to announcement, Ann Pettifor pins the blame for financial chaos not on China's leaders but on a dominant economic model that remains unquestioned in the west.

Asset Allocation Implications of the Global Volatility Premium

The authors examined the role of volatility premiums in institutional investment portfolios. They began by defining and calculating standardized returns to volatility exposure for a variety of global asset markets. They found that shorting volatility offers not only a very high and statistically significant Sharpe ratio of approximately 1.0 but also substantial tail risk. Although classic diversification benefits are limited, the authors show that modest allocations to short volatility exposure could have enhanced long-term returns, in one case increasing the portfolio’s combined Sharpe ratio by 12%.

Capturing the Spillover Effect With Multiplicative Error Models

Recent statistical models for the analysis of volatility in financial markets serve the purpose of incorporating the effect of other markets in their structure, in order to study the spillover or the contagion phenomena. Extending the Multiplicative Error Model we are able to capture these characteristics, under the assumption that the conditional mean of the volatility can be decomposed into the sum of one component representing the proper volatility of the time series analyzed, and other components, each representing the volatility transmitted from one other market. Each component follows a proper dynamics with elements that can be usefully interpreted. This particular decomposition allows to establish, each time, the contribution brought by each individual market to the global volatility of the market object of the analysis. We experiment this model with four stock indices.

Varieties of regional monetary cooperation: a tool for reducing volatility in developing economies?

Can regional monetary cooperation shield developing regions from global volatility? The article argues that the main contribution of regional monetary cooperation to enhancing the shock-buffering ability of its member countries is to provide short-term liquidity and to increase regional trade and financial links. In contrast, traditional optimum currency area (OCA) theories formulate the advantages of regional monetary cooperation in terms of allocative efficiency gains and aim at a full currency union as final stage. As such, traditional theory widely ignores the shock-buffering capacity of regional monetary cooperation as well as their varieties. In contrast, the article argues that intermediate stages of regional monetary cooperation have their own rationales related to such shock-buffering capacity. This paper systematically examines the variety of regional cooperation arrangements in the developing world that range from regional payments systems over the pooling of reserves to exchange rate coordination. We propose that the potential for shock buffering is dependent on the chosen form of cooperation. Furthermore, in contrast to full monetary integration, which is highly demanding in terms of policy coordination, the requirements for regional policy coordination are significantly lower, depending on the form and aim of the arrangement.

Idiosyncratic Volatility and Expected Returns at the Global Level

We investigate the existence and significance of a cross-sectional relation between idiosyncratic volatility and expected returns at the global level by introducing a global idiosyncratic volatility measure and globally diversified test assets. We find that the portfolios with the highest and lowest global idiosyncratic volatility don’t earn significantly different average returns, indicating the absence of a link between global idiosyncratic volatility and expected returns. This result is robust to three different samples utilized; two different asset pricing models, two different data frequencies, and an alternative idiosyncratic volatility definition used to estimate global idiosyncratic volatility; two different weighting schemes to calculate portfolio returns and after controlling for the size of the global idiosyncratic volatility sorted portfolios. It also holds for four different sub-periods and eight subsamples reflecting different states of the economy and stock markets. Our results show that global diversification is effective in stabilizing the returns of global test assets as global investors don’t require a risk premium for bearing global idiosyncratic volatility and that benefits from global diversification can be gained by diversifying across countries or across industries.

Intra-daily volatility spillovers in international stock markets

Using a novel four-phase model based upon a conditional autoregressive Wishart framework for realized variances and covariances we quantify intra-daily volatility spillovers within and across the US, German and Japanese stock markets before and during the subprime crisis. We find significant short-term spillovers from one stock market to the next-trading market, which have substantially intensified during the crisis indicating a global volatility contagion coming from the US market. The strongest contagion with the largest burst of spillover effects from and to foreign markets is observed for the Japanese market, which was prior to the crisis fairly uncoupled from the German and US market. We also find that the crisis leads to a significant reduction of the general persistence of volatility shocks in international stock markets. Hence, it appears that during the turmoil of the crisis news generating volatility become outdated more quickly than before the crisis.

Revisiting the Concept of Dollarization: The Global Financial Crisis and Dollarization in Low-Income Countries

The economic literature has examined deposit dollarization in nominal terms, typically focusing on the ratio of foreign currency deposits to broad money. However, while private agent demand for foreign currency may remain unchanged in foreign currency terms, there could be large fluctuations in the dollarization ratio simply due to exchange rate movements. This paper proposes a new approach to measuring dollarization that removes these exchange rate effects, and demonstrates that beyond the variance of inflation and depreciation, the level of inflation and size of depreciation also matter for dollarization. While dollarization in nominal terms surged during the recent global financial crisis, there was a downward trend in real terms. Employing a set of econometric estimators, this paper investigates whether “real” dollarization during 2006–09 was associated with the crisis, and the role of initial macroeconomic conditions, quality of institutions, risk aversion, and prudential measures. We find that exchange rate appreciation and reductions in sovereign risk do moderate dollarization; but the results for global volatility have low statistical significance, perhaps because global shocks tend to preserve, to a large extent, relative attractiveness of foreign assets. Nonetheless, estimated impulse-response functions point to a large but short-lived positive impact of global volatility on dollarization, which could reflect economic agents heightened concerns about spillover effects of global uncertainty on the domestic economy.

Revisiting the Concept of Dollarization: The Global Financial Crisis and Dollarization in Low-Income Countries

The economic literature has examined deposit dollarization in nominal terms, typically focusing on the ratio of foreign currency deposits to broad money. However, while private agent demand for foreign currency may remain unchanged in foreign currency terms, there could be large fluctuations in the dollarization ratio simply due to exchange rate movements. This paper proposes a new approach to measuring dollarization that removes these exchange rate effects, and demonstrates that beyond the variance of inflation and depreciation, the level of inflation and size of depreciation also matter for dollarization. While dollarization in nominal terms surged during the recent global financial crisis, there was a downward trend in real terms. Employing a set of econometric estimators, this paper investigates whether “real” dollarization during 2006–09 was associated with the crisis, and the role of initial macroeconomic conditions, quality of institutions, risk aversion, and prudential measures. We find that exchange rate appreciation and reductions in sovereign risk do moderate dollarization; but the results for global volatility have low statistical significance, perhaps because global shocks tend to preserve, to a large extent, relative attractiveness of foreign assets. Nonetheless, estimated impulse-response functions point to a large but short-lived positive impact of global volatility on dollarization, which could reflect economic agents heightened concerns about spillover effects of global uncertainty on the domestic economy.

Twin Global Shocks, Dual Policy Response, and Nigeria's Economic Outlook

Since July 2014, after a remarkably favourable half year in which oil price reached a peak of US$115 per barrel and equity market capitalization touched an historic peak of N14 trillion, the Nigerian economy has been buffeted by the twin shocks of global commodity price slump and global liquidity volatility that have translated to dwindling of income and net capital inflows for the county. Oil price bottomed at US$78 dollars per barrel in November, defining a four year low, just as market capitalization dropped to N11 trillion, and external reserves dipped to US$38 billion.After hoping against hope for five months that the tide will turn, the Nigerian government responded with a series of fiscal and monetary policy pronouncements by the end of November. These have put a lot of new angles on the shape of things. Far from resolving the puzzles posed by the twin shocks from abroad, the pronouncements have added two more puzzles at home - a fiscal puzzle and a monetary policy puzzle - triggering a debate about which is more damaging to the outlook: the twin global shocks, or the dual policy response. Watchers of Nigeria’s economic evolution thus face a yearend challenge of resolving four puzzles about Nigeria’s economic outlook!The twin shocks from abroad had inflicted five months of income and spending losses on households, businesses, banks, government and the central bank. A robust response by Nigeria required a methodical evaluation of the plights of each of these units for a holistic intervention. The dual policy response sought to address only the last two units largely by aggravating the negative impact of the external shocks on the first three units, thus compounding their woes, and further dimming the overall outlook of the economy for the coming year.Both the finance ministry and the CBN now urgently need to develop the capacity to think about the requirements of the health of the wider economy - households, businesses, and banks - and learn to use the budget and monetary policy instruments to provide those requirements. Until this is done, Nigeria’s economic outlook is bleak. Not so much because of the twin global shocks, as sensible policy responses can mitigate the adverse effects of those, but much more because of the mediocre dual policy response.

Time Varying Volatility Indexes and Their Determinants: Evidence from Developed and Emerging Stock Markets

This paper investigates volatility spillovers across 16 stock markets of both advanced and emerging economies using the spillover index methodology put forward by Diebold and Yilmaz (2012). Realised volatility as defined by Andersen et al (2003) calculated from high frequency data form the basis on which these spillovers are calculated. They are compared with spillovers based on the volatility estimators put forward by Garman and Klass (1980), Parkinson (1980) and the univariate GARCH methodology (Bollerslev, 1986) used in many previous studies. We find that the time series of total spillovers is similar regardless of the volatility proxy used and spillovers increased dramatically during the global financial crisis of 2008 and the European sovereign debt crisis that followed. More differences arise when comparing directional spillovers to and from individual stock markets, particularly when using GARCH based estimations. We find that the larger stock markets from the advanced western economies, particularly the US, dominate volatility transmission to other markets. Emerging markets such as China, India and Brazil are still relatively isolated and contribute less to global volatility spillovers, though their contribution has increased considerably after 2006. We investigate potential determinants of net spillovers between markets and find that the level of volatility in one market relative to that in other markets is the most important factor in increasing spillovers transmitted.

Tactical Timing of Low Volatility Equity Strategies

Many investors we speak to are interested in making a strategic allocation to low volatility equities to help them better meet their investment objectives. The appeal of this strategy is clear. Low volatility stocks have historically delivered higher returns with lower risk than the capitalization-weighted market. Moreover, the behavioral and market-structural forces that have been suggested as possible explanations are inherently hard to change, which means the anomaly might not readily disappear. However, we often hear two tactical concerns about the timing of an allocation. The first is that relative valuation of low volatility stocks may be expensive compared to the rest of the market so they should wait for more attractive levels. The second is that low volatility stocks, which tend to pay higher dividends, may underperform against the back-drop of potential rate increases. In this research note we examine the validity of these concerns and also incorporate macro-economic and market considerations by researching which factors have been good drivers and predictors of global low volatility equities’ performance relative to the capitalization-weighted index since 1980. We consider valuation levels, the market environment, and the macro-economic backdrop. We find that relative valuation levels have not been a good predictor of low volatility equities’ relative return. In addition, while low volatility equities’ performance was indeed more sensitive to interest rate changes than the capitalization-weighted index, both delivered similar risk-adjusted returns (Sharpe ratios) in rising-rates environments.

Time-Varying Beta And The Subprime Financial Crisis: Evidence From U.S. Industrial Sectors

<p>In the current study, we investigate the effect of the subprime financial crisis on the time-varying beta of 10 U.S. industrial sectors. We use daily data, during the period 2002 through 2014, and the bivariate BEKK-GARCH model to the conditional capital asset pricing model (CAPM) to create the time-varying betas for the 10 sectors. After controlling for local and global volatilities, the data enable us to confirm the different magnitudes of influence of the subprime crisis on the 10 industrial sectors. The results are important for investors and portfolio managers, and may have policy implications.</p>

Determinants of Non-Performing Assets in India - Panel Regression

It is well known that level of banks‟ credit plays an important role in economic developments. Indian banking sector has played a seminal role in supporting economic growth in India. Recently, Indian banks are experiencing consistent increase in non-performing assets (NPA). In this perspective, this paper investigates the trends in NPA in Indian banks and its determinants. The panel regressions, fixed effect allows evaluating the impact of selected macroeconomic variables on the NPA. The Panel regression result indicates that the GDP growth, change in exchange rate and global volatility have major effects on the NPA level of Indian banking sector.