Return Spillovers Research Articles

Connectedness between green bonds, clean energy markets and carbon quota prices: Time and frequency dynamics

In this paper, we investigate the time and frequency dynamics of connectedness among green assets such as green bonds, clean energy markets, and carbon prices. Using daily price data, we explore return spillovers across these green financial markets by applying the novel framework on time and frequency dynamics proposed by Baruník and Krehlík (2018). This allows us to identify the direction of spillovers among our variables, and decompose the connectedness to differentiate between short-term and long-term return spillovers. Our results indicate that green bonds and carbon prices act as net receivers of shocks, but mainly in the short-term. We also observe a low level of connectedness among our clean energy markets across both low and high frequency bands, even during times of economic or political crisis. Additionally, there are periods in which connectedness between the clean energy assets is driven by the long-term. In periods of economic and political stability, carbon prices may also provide an interesting diversifying tool for short-term investors. Our results should be of interest for investors and portfolio managers who focus on green financial markets, by strengthening the notion that green financial markets can offer diversification opportunities, for both short-term and long-term investors. Policy makers could also benefit from our insights on conectedness in their work on short-term and long-term climate policies. This paper is the first to use this framework to investigate systematic risks within green financial markets.

Asymmetric connectedness in the Chinese stock sectors: Overnight and daytime return spillovers

Asymmetric connectedness in the Chinese stock sectors: Overnight and daytime return spillovers

Asymmetric relationship between carbon market and energy markets

This paper examines the asymmetric returns spillovers and time-frequency causality between the carbon emissions market and the energy market. To this end, we apply the time-varying asymmetry spillovers and Granger causality over the spectrum approaches. This research uses daily price indices of natural gas, gasoline, gas oil, heating oil, crude oil, coal, petroleum, kerosene, propane, and diesel to denote the energy market and the European Union Emissions Trading System (i.e., certificate prices for CO2 emissions) to represent the carbon market. Using historical time-series data from May 18, 2011, to September 23, 2020, the study reveals interesting and convincing empirical results showing that the carbon and energy markets are dynamically and asymmetrically connected. Further results show that the carbon market predominantly explains positive or negative returns in the energy market. Regarding volatility transmission, the study demonstrates that the carbon market is a primary net receiver of good or bad volatility transmitted from the energy market, such as crude oil, petroleum, heating oil, diesel, and kerosene.

Is Bitcoin a hedge or safe-haven asset during the period of turmoil? Evidence from the currency, bond and stock markets

Market turmoil, such as that induced by Covid-19, tends to create huge pressure on financial markets, forcing decision-makers and investors to analyze risks and manage their investment portfolios. Taking the market turmoil induced by Covid-19 as an example, this study addresses the question of whether Bitcoin exhibits a hedging and safe haven property during the period of turmoil. We employ the TVP-VAR approach to investigate return spillovers and interconnectedness among Bitcoin and stock, money, and bond markets. In addition, we employ three portfolio techniques, including minimum variance portfolios, minimum correlation portfolios, and minimum connectedness portfolios, to evaluate the Sharpe ratios of the portfolios as well as the cumulative return before and during the epidemic. The results demonstrate that incorporating Bitcoin decreases total connectedness across markets, and Bitcoin provides stronger hedging and safe haven capabilities. Notably, the portfolio with minimum connectedness approach reaches the highest Sharpe ratio during the pandemic.

Unveiling asymmetric return spillovers with portfolio implications among Indian stock sectors during Covid-19 pandemic

This paper aims to provide a systematic inquiry into the return spillover dynamics between a network of Indian sectoral indices during the pre- and post-pandemic periods. To analyze the same, this paper uses the asymmetric time-varying parameter vector autoregressions (TVP-VAR) framework. Furthermore, in the spirit of Broadstock et al. (2020), we perform dynamic portfolio exercises based on common hedging techniques and the minimum connectedness portfolio approach to determine what better captures asymmetry. Our daily dataset includes 12 sectoral stocks spanning from January 01, 2017, to May 5, 2023. The findings reveal that negative connectedness dominates throughout the sample period, demonstrating that profit-maximizing agents and risk-averse investors are more likely to react negatively to news. We also show that in the network, the average net transmitters are the banking and other financial service sectors, whereas the net receivers are the information technology, pharmaceutical, and fast-moving consumer goods sectors throughout the period under consideration. Our results show that the minimum connectedness portfolio (MCoP) approach is a very useful method based on Sharpe ratios, as it is either the first or second most profitable among these three competing methods. These results, therefore, yield valuable insights for policymakers and investors

Economic Echoes of Conflict: Evaluating the Palestine-Israel War’s Influence on Middle Eastern Markets

ABSTRACT This study examines the Palestine-Israel conflict’s effects on Middle Eastern financial markets, including conventional and Islamic indices. Employing wavelet cross-correlation, global VAR (GVAR), and Granger causality analyses, we identify complex patterns in pre-conflict geopolitical risk (GPR) and stock returns, including diverse lead/lag behaviors and amplitude fluctuations. Post-conflict, these dynamics show smoother adjustments and stronger cross-correlations. The pre-conflict wavelet GVAR analysis reveals country-specific reactions to anticipated GPR shocks, marked by asymmetric responses starting around 20 days post-shock and varying across nations. This period also features significant shock spillovers in stock returns, both positive and negative. During the conflict, initial reactions include substantial spikes in raw stock returns, suggesting possible co-crash scenarios. These evolve into predominantly positive short-term shock spillovers, with medium and long-term responses suggesting stock markets as potential safe havens. Lastly, wavelet Granger causality analysis reveals bidirectional causality between GPR and stock returns over the long term, with specific countries showing varied causality patterns during the conflict. The inclusion of Islamic indices demonstrates homogeneous responses to GPR shocks, similar to conventional markets, highlighting the integrated nature of these markets. This study underscores the complex temporal dynamics of market responses to geopolitical shocks and provides insights for policymakers and investors.

Interconnectedness and return spillover among APEC currency exchange rates: A time-frequency analysis

By combining TVP-VAR Model (time domain connectedness) and TVP-VAR based Baruník and Křehlík model (frequency domain connectedness), this study analyzes the impact of the COVID-19 pandemic, the Russia-Ukraine war, and the Silicon Valley Bank (SVB) collapse on the Asia Pacific Economic Cooperation (APEC) forum currency exchange rates. The results reveal that APEC currencies have time-varying effects (tend to cluster in appreciation and depreciation patterns in both the short and long term) and have generated higher total return spillover during COVID-19 (in the time domain) than the Russia-Ukraine war and SVB collapse. During COVID-19 (87.18 %) (total return spillover), impacts were more severe than the Russia-Ukraine crisis (79.49 %) and the Silicon Valley Bank collapse (75.55 %). Moreover, the South Korean won, Thai Bhat and Australian Dollar are identified as consistent shock transmitters, and Malaysian Ringgit, Philippine peso, Indonesian Rupiah, and Chinese Yuan as consistent shock receivers in the time domain. The findings have substantial repercussions for financial regulators and investors.

The end of ESG? Return spillover between ESG and non-ESG portfolios

We investigate the return spillover between firms with environmental, social and governance (ESG) and non-ESG disclosure. Using a sample of Chinese firms from 2010 to 2022, we find that the ESG portfolio return has a stronger spillover effect on the non-ESG portfolio return. Moreover, the spillover effect between the two portfolios has decreased significantly in recent years, indicating that investors recognise ESG's unique advantage. Important global events, such as stock market crashes, the Sino–US trade wars and epidemics, increase ESG spillover into non-ESG portfolios.

On bank stock return spillovers in South Africa: Implications for portfolio hedging

The purpose of this study is to investigate the return spillovers among the five systemically important banks in South Africa. The study employs a time-varying parameter vector autoregression (TVP-VAR) framework utilising daily data between 2000 and 2024. A minimum return connectedness portfolio is constructed from the spillover indexes and compared with traditional portfolio optimisation methods in terms of risk reduction and reward-to-risk ratios. The research findings reveal that Capitec, the smallest bank in terms of assets, has weaker return connectedness with other banks while ABSA, FirstRand, Nedbank and Standard Bank are moderately connected. Moreover, the two largest banks in terms of assets, Standard and FirstRand, are more connected than any other pairwise connection in the network. During significant events such as national elections, the global financial crisis and the COVID-19 pandemic, system-wide connectedness increases.

Connectedness and frequency connection among green bond, cryptocurrency and green energy-related metals around the COVID-19 outbreak

We investigate the return interdependence among green bonds, cryptocurrency indices and green energy-related metals. We apply time-varying parametric vector autoregression (TVP-VAR) conenctedness, wavelet coherence, Wavelet Quantile Correlation （WQC) and Quantile on Quantile (QQR) Connectedness Methods. Our empirical findings show that return connectedness has become even stronger after the outbreak of COVID-19, with both green bonds and cryptocurrency indices acting as net receivers of return spillovers. Surprisingly, Copper functioned as a net sender of return spillovers over the entire observation period. Findings revealed that the cryptocurrency index exhibited a consistent positive correlation with the green energy-related metals market at medium to short-term frequencies, whereas green bonds showed a negative correlation with metals market at short-term frequencies and a positive correlation at long-term frequencies.

Financial market spillovers and investor attention to the Russia-Ukraine war

This study examines the impact of the Russia-Ukraine war on global commodity and financial markets by analysing the volatility and return spillovers of 26 assets across six different markets. We find significant increases in volatility spillovers after the invasion although increases in return spillovers were milder. Stock and currency markets were the leading spillover transmitters and receivers. Investor attention to the conflict played a large role in driving market spillovers, particularly in extreme quantiles. Meanwhile, uncertain market conditions seem to provide significant feedback to investor attention, resulting in amplified market risk. Our findings highlight the substantial effect of the Russia-Ukraine war on global market spillovers and the role of investor attention in shaping these dynamics.

MEASURING CONNECTEDNESS AND NETWORK ANALYSIS IN STOCK MARKETS FOR DEVELOPED AND DEVELOPING COUNTRIES

Countries are experiencing a surge in political, economic, and financial integration, consequently shaping international market linkages. Financial crises can rapidly spread between countries, emphasizing the need to monitor and assess stock market connections. This paper investigates the degree of financial market connectedness using daily stock returns from January 1997 to August 2017 for 13 countries, both developed and developing. The connectedness measure of Diebold and Yilmaz (2009-2012) is applied to examine the connectedness of stock market returns and the direction of spillovers for all stock markets. This study also analyzes the dynamic connectedness from the U.S. stock market to all other stock markets. The results indicate that the U.S. stock market is the most influential stock market to the others. The results of the dynamic analysis show that connectedness changes over time, specifically during turmoil periods. Most developed countries are transmitters of return spillover shocks while developing countries are recipients.

Return and volatility connectedness between agricultural tokens and us equity sectors

This study investigates the return and volatility interconnectedness between emerging digital assets, specifically agricultural tokens, and U.S. equity sectors using the TVP-VAR model. Analyzing data from August 7, 2020, to January 2, 2024, the findings indicate modest interconnections between agricultural tokens and U.S. sectors, with time-varying behavior. Notably, return interconnectedness is generally stronger than volatility, except at the sample period's outset, where volatility dominates. Return spillovers predominantly drive the connectedness system, though agricultural tokens uniquely act as net recipients of both return and volatility spillovers, while U.S. equity sectors mainly transmit spillovers. Optimal portfolio analysis, utilizing portfolio weights and hedge ratios, reveals that incorporating agricultural tokens offers portfolio diversification benefits and enhances hedging performance. Investors are advised to frequently adjust portfolios to maximize diversification and hedging gains. These findings provide significant portfolio implications for policymakers, market participants, and investors.

Return and volatility spillovers between the raw material and electric vehicles markets

This paper investigates the return and volatility spillovers between the upstream electric vehicles (EV) battery raw materials market and the individual downstream EV producers. The study uses the daily stock returns of two lithium producers and a new model in the GARCH family to capture the jump component of volatility in the EV battery raw materials market. Return and volatility spillovers are studied using an EGARCH(1,1) model including the excess stock returns of lithium producers in the mean equation and their jump component intensity in the variance equation. The results indicate that jumps exist in the EV battery raw materials market and that there exist significant return spillovers between lithium and EV producers. However, this paper did not find any strong evidence of the existence of volatility spillovers between these two markets through lithium unexpected news.

Dynamic interconnectedness of economic confidence, energy prices, and interest rates: Insights from the euro area

This work examines the time-varying interlinkages among economic confidence, energy prices, geopolitical stress, and short/long-term interest rates in the Euro Area. Our research meticulously explores the interplay between economic confidence and various determinants, including financial indicators, geopolitical stress incidents, and energy prices. Employing innovative approaches such as the time-varying parameter vector autoregression (TVP-VAR) time and frequency-domain connectedness, we uncover the nuanced relationships between economic confidence, financial indicators, and energy prices. We illuminate the systemic nature of shock transmission in the Euro Area, identifying key net transmitters and recipients of shocks, with short-term interconnectedness emerging as a dominant feature, especially during pivotal events such as the global financial crisis, the COVID-19 pandemic, and geopolitical conflicts. Our empirical findings can be summarized as follows: First, both the time and frequency-domain connectedness indexes correctly associate with major financial/geopolitical events. Second, BCI and CCI respond to the GFC asymmetrically. Third, Brent and short/long-term interest rates are the net transmitters of shocks on average. Fourth, there is a considerable augmentation in return spillovers during the period characterized by the pandemic crisis compared to the GFC. Finally, our findings for frequency-dependent connectedness networks indicate that the market is particularly susceptible to short-term shocks. This study has significant ramifications for investors, market players, and policymakers.

Stock Returns and Volatility Cross-Spillover Effect Between Sri Lanka And Asian Stock Markets

Sri Lanka holds a pivotal position in the Indian Ocean, fostering significant economic ties with South Asia, the Middle East, and Africa. This study examines the financial linkages and stock market behavior between Sri Lanka and key Asian economies (India, China, Pakistan, and Japan) from 2015 to 2021. Using daily stock prices from Bloomberg.com, the analysis employs the EGARCH (1,1) model to assess return and volatility spillovers. Results reveal negative return spillovers from India to Sri Lanka and cross-volatility spillovers from India, China, Pakistan, and Japan to Sri Lanka. Conversely, Sri Lanka exhibits negative return spillovers to India and Pakistan and cross-volatility spillovers to China and Japan. Sub-analysis identifies structural breaks in December 2019, indicating shifts in spillover dynamics pre- and post-Covid-19. These findings offer insights for investors, policymakers, fund managers, and governments to optimize investment strategies, formulate stable policies, and enhance portfolio diversification.

Volatility spillover across spot and futures markets: Evidence from dual financial system

This paper investigates dynamic returns and volatility spillovers between spot and futures markets in a dual financial system. It further analyses the shock transmission of both volume trading and open interest in the futures market. Empirical results suggest that both spot and futures indices are net transmitters of return spillovers to the volume and open interest of the futures market, whereas the futures volume is the only net transmitter of volatility spillovers to all other variables. This is consistent with the Information Arrival Hypothesis theory. The empirical analysis also evidences the presence of a dynamic interdependence between both Islamic and conventional spot market volatilities and the futures market. In particular, the returns and volatility spillover are bidirectional and ricocheting-off transmission in nature. Specifically, such interdependence is stronger in the case of the Islamic spot index than the conventional spot index and during financial shocks.

Dynamic Interlinkages between the Twitter Uncertainty Index and the Green Bond Market: Evidence from the Covid-19 Pandemic and the Russian-Ukrainian Conflict

AbstractThis study examines the time-varying connectedness between green bonds, Twitter-based uncertainty indices, and the S&P 500 Composite Index. We implement the time- and frequency-based connectedness methodologies and employ data between April 1, 2014 and April 21, 2023. Our findings suggest that (i) connectedness indices robustly capture prominent incidents during the episode; (ii) Twitter-based uncertainty indices are the highest transmitters of return shocks; (iii) net return spillovers transmitted by the S&P 500 Index sharply increased in 2020:1–2020:3, stemmed by the stock market crash in February 2020; and (iv) Twitter-based uncertainty indices showed significant net spillovers in July and November 2021.

Interlinkage of an Emerging Market with Financial Assets: Evidence from Three Well-Known Econometric Models

This research seeks to offer a thorough investigation of the return and volatility spillover dynamics between DSEX and five financial assets from Gold, currency rates, energy, and stock indexes. Previous studies only used one econometric model to estimate the results, but this work used three well-known models for cross validation and also used portfolio weights and an optimal hedge to control risk. The DCC-GARCH technique is used to examine volatility spillovers, and the Quantile VAR and TVP-VAR frameworks are used to examine return spillovers. Surprisingly, three separate methodologies all provided equal results and arrived at the same conclusion. This study's findings corroborate the premise that these six components frequently exhibit considerable co-movement in futures trading. This paper illustrates that investors can greatly benefit by altering their portfolios based on the dynamic weights and hedge ratios, even if there is a trade-off amongst the degree of risk mitigation and portfolio revenue.

Uncertainty and financial asset return spillovers: are they related? Empirical evidence from three continents

Uncertainty and financial asset return spillovers: are they related? Empirical evidence from three continents