Transmission Of Shocks Research Articles

Asymmetric Higher-Moment spillovers between sustainable and traditional investments

This study proposes a novel framework that decomposes volatility and higher-moment kurtosis into good and bad volatility/kurtosis—related to positive and negative shocks, respectively. Accordingly, we analyze the spillover effects of good and bad volatility/kurtosis between sustainable and traditional investments separately. During most periods, bad volatility spillovers dominate good volatility spillovers, whereas good kurtosis spillovers dominate bad kurtosis spillovers. However, during specific extreme events, such as Brexit and COVID-19, bad kurtosis spillovers dominate. This study’s findings can help investors in developing extreme risk management strategies and policymakers in preventing harmful shock transmissions across markets and fostering financial stability.

Spillovers between cryptocurrencies and financial markets in a global framework

We employ the Bayesian Global Vector Autoregression (BGVAR) model to examine the transmission of adverse shocks originating in the cryptocurrency market to global financial markets. The analysis shows that these spillover effects are not limited to a specific group of countries but are instead global in nature. The results indicate that shocks originating in the cryptocurrency market adversely affect stock markets, bond indices, exchange rates, and volatility indices. These shocks, while typically moderate in magnitude and short in duration, suggest that cryptocurrencies act as mediators of short-term negative shocks. The study also underscores the heterogeneous nature of these impacts across different financial markets and countries, highlighting the varying sensitivities and responses to cryptocurrency market fluctuations. Importantly, this research represents the first application of the GVAR model in the context of the cryptocurrency market, to the best of our knowledge.

International transmission of monetary policy shocks and the bank lending channel: Evidence from Australia

International transmission of monetary policy shocks and the bank lending channel: Evidence from Australia

Riding the waves of investor sentiment: Cryptocurrency price and renewable energy volatility during the pandemic-war era

This study explores the interplay between cryptocurrency price volatility and renewable energy dynamics amid crises, particularly during the COVID-19 pandemic and the Russia-Ukraine conflict. Utilizing a Quantile Vector Autoregression (QVAR) model with daily data from April 1, 2015, to September 23, 2022, we assess the interconnectedness of cryptocurrency volatility, investor sentiment, and energy fluctuations. Our findings reveal a significant temporal variation in systemic connectedness influenced by recent global events. Overall, we observe approximately 30 % connectivity in the short run and 6 % in the long run. Notably, Bitcoin and the Fear and Greed Index shifted roles from net shock receivers to transmitters over various periods. Financial and macro uncertainties primarily acted as shock transmitters during 2017 to early 2022. Furthermore, investor sentiment transitioned from a shock transmitter before the pandemic to a shock receiver during it. The analysis underscores the substantial impact of extraordinary events e.g., the COVID-19 pandemic, the Russia-Ukraine conflict on market dynamics.

Connectedness between energy cryptocurrencies and US equity markets: A quantile-based analysis

Energy cryptocurrencies emerge as a new class of digital assets for morally conscientious investors to build long-term portfolios with high risk-adjusted returns. Focusing on this unique asset class, the current study investigates the static and dynamic spillovers between energy cryptocurrencies and US equity sector stocks at various quantiles. We apply the quantile VAR technique on the selected sample of four energy cryptocutrrencies and eleven major US equity markets for February 27, 2018 to November 25, 2022. This period includes two important subperiods: COVID-19 and the Russian-Ukraine War. Our findings support higher connectedness levels at the extreme lower and upper quantiles compared to the mean and median quantiles. While all energy cryptocurrencies are shock receivers at the extreme lower quantile, the majority of US equity sector stocks are shock transmitters at the lower quantile. The IT sector is a shock receiver at all quantiles, whereas the energy sector is a shock transmitter. Overall connectedness fluctuates over time and shows a significant rise at the start of the COVID period. Our results provide insights to investors, portfolio managers, and policymakers regarding portfolio allocation, forecasting, and risk management during downward and upward market conditions. Additionally, the ideal hedge ratios slightly increased during the COVID-19 pandemic, which increased the cost of asset coverage.

Importance of geopolitical risk in volatility structure: New evidence from biofuels, crude oil, and grains commodity markets

This paper aims to explore the complex linkages and evolving structure of price volatility in the global oil, biofuels, and grain commodity markets during periods of global turbulence. With the growing urgency for energy stability amid climate change, biofuels are gaining traction as a viable alternative energy source. However, their production can significantly impact essential commodities like grains and vegetable oils, increasing food prices and heightened market volatility. We introduced a TVP-VAR frequency connectedness method to address this, analyzing data from January 1, 2013, to September 29, 2023. Our approach offers a fresh perspective on market dynamics and geopolitical risks.The study underscores the growing influence of agricultural shocks on energy markets, particularly within the ethanol sector. It confirms that the Russia-Ukraine war, a significant geopolitical event, has had a profound and enduring impact on the interconnectedness of these markets across various timeframes and frequencies. We offer concrete, actionable policy recommendations to mitigate the transmission of market shocks within the energy and food sectors, thereby bolstering investor and policymaker confidence and facilitating informed decision-making.

How do sectoral elasticities affect the transmission of monetary shocks?

PurposeThe presence of heterogeneity in price stickiness has been previously shown to be the main determinant of the real effects of nominal shocks. The paper presents theoretical results that highlight the significance of labor mobility and intratemporal elasticity of substitution across sectors.Design/methodology/approachThis paper explores output dynamics in a closed economy, relying on a New Keynesian model that accounts for heterogeneity in price stickiness across sectors.FindingsThe key finding from the analytical results is that changes in labor mobility and intratemporal elasticity of substitution across sectors have an equivalent impact on sectoral output when accounting for differences in price stickiness. The model is then calibrated for the US economy using data from the manufacturing and services sectors, providing validation for the analytical results.Originality/valueConventional models often assume either immediate labor reallocation across sectors following shocks or no labor mobility at all. Additionally, these models assume either strong complementarity in consumption or some degree of substitutability. This paper demonstrates the crucial role that labor reallocation and the elasticity of substitution across goods across sectors play in generating well-known economic outcomes.

Electricity Price and Inflation: Macroeconomic Implications of Real-Time Pricing

Electricity prices can be an important driver of inflation. However, the transmission from wholesale electricity price to inflation depends on the type of pricing mechanism in the retail market. Using the introduction of Real-Time Pricing (RTP) in the Spanish retail electricity market, we analyze the transmission of wholesale electricity price shocks to inflation dynamics and how this transmission is affected by the introduction of RTP. The main findings are that—after RTP was rolled out—electricity price shocks display a swifter transmission to inflation while the maximum impact is around three times higher than in the previous period. This higher transmission is not only generated by a more pronounced reaction of the retail electricity price but is also caused by a greater transmission of these shocks to core inflation. These results imply that introducing RTP impacts inflation dynamics and, therefore, affects how central banks should react to this type of shock. JEL Classification: E31, Q43, Q48

Spillover between investor sentiment and volatility: The role of social media

We examine the spillover effects between social media sentiments and market-implied volatilities among stock, bond, foreign exchange, and commodity markets. We find that information mainly spillovers from volatility to sentiment indices, with the VIX being the most significant net transmitter. Within each asset class, there is a more pronounced spillover from volatility to sentiment compared to the reverse, implying that a significant portion of investor sentiment is volatility-driven. This relationship intensifies in turbulent economic periods, such as during the Global Financial Crisis, Brexit, the US-China trade war, and the COVID-19 pandemic. Our analysis also reveals that sentiment indices can transition from net receivers to net transmitters of shocks during turbulent periods. This can be explained by the echo chamber effect, where social media echo prevailing news signals, and some investors interpret repeated signals as genuinely new information.

Oil price shocks, sustainability index, and green bond market spillovers and connectedness during bear and bull market conditions

This study examines the spillover dynamics and interconnectedness amongst sustainability indices, green bond markets, and oil price shocks. Using data from June 2013 to February 2023, this study employs spillover index methodology to analyze the transmission of shocks and volatility. The findings reveal that there is time-varying connectedness between all variables, which evidences a significant boost during times of crisis and extreme circumstances. Furthermore, the North American and US sustainability indices, along with the SP500 Environmental, Social, and Governance (SP_ESG) index, act as significant transmitters of shocks and volatility to other markets under different market conditions. Conversely, the Asia-Pacific, emerging market, and European sustainability indices, along with the green bond index, have emerged as net volatility receivers. Additionally, the study highlights the role of oil risk shocks as a transmitter of volatility under normal and bullish market statuses, while becoming a receiver in the lower quantile. These results have noteworthy implications for understanding the interdependencies and risks within financial markets and provide insights for investors, policymakers, and market participants.

Quantile connectedness between social network sentiment and sustainability index volatility: Evidence from the Moroccan financial market

The goal of this paper is to investigate the connectedness between investor sentiment and volatility on the environmental, social, and governance index (ESG) in Morocco. Therefore, on the basis of an investor sentiment index constructed from the X platform, and using quantile and frequency connectedness approaches, the findings reveal a significant connectedness between sentiment and ESG volatility, particularly during turbulent events. Although sentiment acts most of the time as a net receiver of shocks, notably during the COVID-19 pandemic and geopolitical crises, it sometimes becomes a net sender of shocks. Furthermore, the spillovers between sentiment and ESG volatility are determined mainly by the long-term component, especially during extreme events, implying the persistence of shock transmission due to high uncertainty. The results also illustrate the impact of market conditions on the spillovers between sentiment and ESG volatility. The conclusions of this study provide useful guidance for pro-ESG investors, policymakers, and companies.

Connectedness of global energy markets with global agricultural, natural resources, and socially responsible investments using extended GFI

PurposeThe study aims to investigate the risk transmission from COVID-19 to global agriculture, energy, natural resources/mining and environmentally/socially responsible investments. Additionally, it explores the connectedness of global energy indices with global agriculture, natural resources/mining and environmentally/socially responsible investments. The study develops a new COVID-19-based Global Fear Index (GFI) to achieve the objectives, thus contributing to the prevailing literature.Design/methodology/approachThe data of Global indices are selected from January 2020 to December 2021. The study uses multivariate BEKK-GARCH and TVP-VAR models to explore COVID-19 risk transmission and connectedness between global indices.FindingsSignificant shock and volatility transmissions from COVID-19 to all global indices are observed. Results show that global agriculture, natural resource/mining markets and environmentally and socially responsible investments are safe havens during COVID-19. Furthermore, these global investment choices are barely connected with global energy indices.Practical implicationsPortfolio managers and investors should invest in global indices to gauge the risk-adjusted return during the pandemic and upcoming health-related risks. Investors in energy sectors are advised to diversify the risk by adding safe-haven assets to their portfolios.Social implicationsThe findings shed light on the importance of environmentally and socially responsible investments as a separate asset class where ecologically friendly and socially sentimental investors could invest in diversifying the risk of their portfolios.Originality/valueThe paper offers valuable insights to policymakers and investors regarding asset pricing, risk management and financial market stability during pandemic-type emergencies.

Financial Contagion between German and BRICS Stock Markets under Multiscale Scrutiny

We employ wavelet analysis using the maximum overlap discrete wavelet transform (MODWT) to examine the return and volatility interconnectedness between the German equity market (a prominent representative of the Eurozone market) and the BRICS countries over the period 2005–2017. Specifically, we investigate the presence of the pure form of financial contagion in the stock markets of Brazil, Russia, India, China, and South Africa subsequent to the Eurozone Sovereign Debt Crisis (EZDC). Our results indicate the presence of financial contagion between the Eurozone equity market and its counterparts in South Africa and Russia, characterised by co-movement and volatility spillover effects. This contagion is particularly evident at higher frequencies, suggesting that the transmission of shocks occurs rapidly across these markets in the short term. No financial contagion is observed in the Brazilian, Chinese, and Indian stock markets during the European Sovereign Debt Crisis. The absence of financial contagion observed in these three BRICS countries during the European Sovereign Debt Crisis suggests that policymakers in these countries should prioritise addressing idiosyncratic shock channels.

Dynamics of global energy, geopolitics, and climate policy on inflation: A cross-regional analysis

This study investigates the intricate dynamics between the Consumer Price Index (CPI) and three critical determinants—Global Price of Energy (GPE), Geopolitical Risk (GPR), and Climate Policy Uncertainty (CPU)—across Europe, the USA, and China from February 1992 to April 2023. Using advanced methodologies, including time-varying Granger causality tests and a connectedness approach, we reveal that CPI consistently acts as a net receiver of shocks. The Total Connectedness Index (TCI) demonstrates a persistent and evolving mutual influence among these variables. Geopolitical Risk is identified as a constant net transmitter of shocks, while the role of Global Price of Energy evolves over time, and Climate Policy Uncertainty shows variable interactions with CPI. Our pairwise directional connectedness analysis highlights GPR's dominant impact on CPI and unveils distinct patterns in the relationships between CPI and the other determinants. This comprehensive approach provides a detailed understanding of the temporal and directional dynamics of inflation, offering valuable insights for policymakers and scholars. These findings underscore the need for nuanced economic strategies to address inflationary pressures and inform future research on the complex interplay of global economic factors.

Spillover relationships between international crude oil markets and global energy stock markets under the influence of geopolitical risks: New evidence

The VAR-LASSO connectedness method and VAR-X-LASSO connectedness method are employed in this study to explore the intricate spillover relationships between international crude oil markets and global energy stock markets while also examining the impact of geopolitical risks on these spillover relationships. By comparing the connectedness indices derived from the VAR-X-LASSO connectedness method and the VAR-LASSO connectedness method, this paper yields some intriguing empirical findings. First, the net transmitter of systemic shocks mainly appears in energy stock markets within developed countries. Second, we observed the net spillover direction from energy stock markets in most developed countries, especially those in the United States, Canada, France, Italy, Norway and Spain, to international crude oil markets, and the net spillover direction from international crude oil markets to energy stock markets in most developing countries. Third, geopolitical risks have been observed to strengthen the unidirectional spillover intensity from international crude oil markets to energy stock markets, and their influence intensified after 2015. However, there is minimal influence of geopolitical risks on the unidirectional spillover effects from energy stock markets to international crude oil markets.

Private ownership in monopolistic competition models

Motivated by empirical evidence, I study the properties of a monopolistic competition model with private ownership. Toward that goal, I consider a monopolistic competition model with additive preferences, homogeneous workers and homogeneous firms. I then introduce in such a standard framework a single additional ingredient: private ownership. Private ownership means that each firm is owned and managed by a single household called the entrepreneur, and this entrepreneur receives profits as sole revenues. In turn, private ownership changes the nature of entry. Free entry in the industry is no longer satisfied. Rather, the number of firms is now determined through occupational choice. Armed with this new framework, I provide a full characterization of a market equilibrium, and compare it to the standard model with collective ownership and free entry. Notably, I find new results concerning optimality, the transmission of aggregate shocks and the ability of the new model to replicate well-established empirical facts.

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.

Untangling the finance-growth nexus: The dual role of financial development in the transmission of shocks

Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterizing the probability density of GDP growth conditional on foreign and domestic financial stress indicators in a panel of 24 emerging countries. Our robust results unveil a previously unexplored dual impact of higher degrees of financial development on the transmission of financial stress: while the effect of global factors is attenuated, the impact of domestic factors is exacerbated. This result highlights a previously unexplored channel through which financial development can alter the link between financial (in)stability and GDP growth.

Term structures and firm dynamics: A FAVAR approach

This study employs a Factor-Augmented Vector Auto-Regression approach with Chinese bond markets and aggregated firm-level data to investigate the impact of term structure shocks on firm dynamics and aggregate firm-level variables. We address the potential endogenous issue using a novel instrumental variable based on textual analysis, and find that term structure shocks have long-run and persistent influences on several firm-level outcomes, and that firm dynamics play a critical role in the transmission of term structure shocks.

Spillover Effects between Oil, Gold, Stock, and Exchange Rate Returns in Thailand: An Extended Joint Connected TVP-VAR Approach

The objective of this study is to analyze the spillover effects among the returns of oil, gold, the stock market, and exchange rates in Thailand. Using the time-varying parameter vector autoregression model (TVP-VAR) with extended joint connectedness and data from April 2002 to March 2024, our analysis reveals a moderate level of the dynamic linkage among these returns. We observe that the dynamic connectedness among all returns varies over time, influenced by global economic events and country situations. Notably, in Thailand's landscape, stock market and gold returns act as net shock transmitters, with the stock market exhibiting the highest volatility among all variables, while oil and exchange rate markets function as net recipients. These insights significantly contribute to understanding asset and commodity markets and offer valuable policy implications for effectively managing these markets.