Spillover Index Research Articles

RETURN AND VOLATILITY SPILLOVER ACROSS STOCK MARKETS OF THE US AND ITS MAJOR TRADING PARTNERS

ABSTRACT This Study Applies The Diebold And Yilmaz (2012) Spillover Index Methodology To Analyze The Effects Of Return And Volatility Spillovers Between The Us Market And Its Major Trading Partners Using Weekly Stock Market Returns From January 2011 To December 2019. The Findings Provide Credence To The Hypothesis That The Us Market Has Been The Most Influential In Terms Of Return Spillover (259.5) To Other Stock Indexes, With The Biggest Return Spillovers Occurring In The Canadian Market (58.4) And The German Market (57.0). In A Similar Manner, The Us Market Has Been The Biggest Transmitter Of Volatility Spillover (202.3) To Other Stock Indexes, With The Highest Volatility Spillovers Occurring In The Canadian Market (51.8) And The German Market (45.8). The Us Market Has Been The Most Influential Based On Return And Volatility Spillovers. This Finding Also Suggests That The Us And Chinese Markets Are The Least Vulnerable To Foreign Shocks. In Contrast, The Canadian Market Is The Most Vulnerable To External In Terms Of Return Spillover And Volatility Spillover. As A Consequence, Chinese Stock Market Participants Can Still Reap The Rewards Of Diversity. During The Sample Period, However, Integration Across Developed Stock Markets Has Increased, Reducing The Benefits Of Diversity. Keywords Return and Volatility Spillovers, Diebold and Yilmaz (2012) Spillover Index, Rolling Window Analysis

Time-Frequency Spillovers and the Determinants among Fossil Energy, Clean Energy and Metal Markets

Using the frequency-domain spillover index method, we investigate time-frequency spillovers and their underlying drivers among fossil energy, clean energy and metal markets. We find that short-term spillovers are stronger than long-term spillovers. Global clean energy markets are powerful spillover transmitters that can have strong impacts on fossil energy and metal markets. Rare earth metals are most vulnerable to spillover effects from clean energy and base metal markets, particularly in the long term. Different clean energy sources and metal markets have heterogeneous connectedness, e.g., the impact of wind energy on rare earth market is greater than that of solar energy. The short-term spillovers are mainly driven by policy changes, while the long-term spillovers are mainly affected by stock market uncertainty and economic fundamentals. Our findings have important implications for the construction of optimal diversification strategies and the design of policy incentives to promote clean energy investments across different time horizons.

Dynamic volatility spillover between oil and marine shipping industry

Oil consumption not only makes up a large percentage of the overall operating expenses for the marine shipping industry, besides that, the tanker sector is a major carrier of global oil supply, which magnifies the relevance of oil market for the shipping industry. In this backdrop, the following study examines the volatility transmission between marine shipping industry’s tanker and dry cargo market and oil market using daily data from May 2006 to August 2021 by employing spillover index methodology. The empirical results suggest pronounced spillovers for the tanker market while lower spillovers are observed for dry cargo market, indicating the well-integrated tanker market in comparison to dry cargo sector and oil market. The volatility in oil prices contributed higher spillovers in the tanker market, and remained a net contributor. The volatility in oil prices is a significant source of the volatility transmission during periods of the sudden drop in oil prices coupled with the higher volatility in oil market, and is a net receiver during stable periods. The period of higher spillovers lasts longer for the tanker sector as compared to dry cargo sector. In the particular case of dry cargo market, the smaller (larger) the size of the vessels, the greater (lower) are the spillovers observed (From and To). Hedging turns out be irrelevant during turmoil periods, as the comovement between shipping and oil market becomes stronger. The spillovers are pronounced during the period of financial crisis, COVID-19 and 2014–2016, owing to the significant fluctuations in oil prices and a troubled period for marine shipping industry.

Analysis of the spillover effects between green economy, clean and dirty cryptocurrencies

Cryptocurrencies have been widely used as financial instruments over the past decade. Given the development of the cryptocurrency market and the increasing awareness of greener and more energy-efficient tokens, their connection to the green economy has become a popular topic for understanding economic and policy issues. However, the literature still lacks clear evidence on how cryptocurrencies interact with green economy indicators. Therefore, this study examines the correlations and spillover relationships between green economy indices, five black cryptocurrencies, and five clean cryptocurrencies for the U.S., Euro, and Asian markets. To this end, it applies the novel quantile spillover index approach of Ando et al. (2018) to daily data from November 9, 2017, to April 4, 2022. The empirical results show that the overall linkage is stronger for green economy indices and clean cryptocurrencies than for dirty cryptocurrencies. Moreover, green economy indices show net receiving behavior, while cryptocurrencies' results differ across variables, quantiles, and time. In addition, a notable point for clean cryptocurrencies is 2020, which was the start of the COVID-19 pandemic. The overall spillover effect is very high for all quantiles for the three markets, especially for Asia. This outcome signifies the safe harbor property for diversification purposes of the green economy. The results presented in this study are important for investors, regulators and, policymakers, cryptocurrency founders as they seek to be financially integrated and develop a more sustainable business.

The Link between Digitization and the Sustainable Development in European Union Countries

Digitalization and sustainable development represent two highly topical subjects, each of them being primarily debated in the literature. Although it is evident that digitalization brings new opportunities and challenges for the management of organizations and for meeting their sustainable strategies, there are relatively few studies analyzing the relationship between the two. Therefore, the objective of the present study is to analyze the relationship between digitalization and sustainable development in the European Union (EU) countries, between 2019 and 2021, before and during the COVID-19 pandemic. On this matter, the link between Digital Economy and Society Index (DESI), on one side, and Sustainable Development Goal Index (SDG Index) and Spillover Index (SS Index), on the other side, has been analyzed using correlations. While DESI refers to the monitoring of digital advancement of the EU member states, SDG Index and SS Index are based on many indicators and give a multidimensional perspective regarding sustainable development. Results show a positive and significant relationship between DESI and SDG Index, and the effect gradually decreases during the analyzed period. Regarding the relationship between DESI and SS Index, the correlation was negative, but significant in 2020 and 2019 only. At the level of each geographical region, the relationship between DESI and SDG Index was positive, with a larger effect in the Northern and Western region and the Southern region compared to the Central and Eastern region, but this effect was not statistically significant. In addition, the relationship between DESI and SS Index was negative and significant at the level of the Central and Eastern region and the Southern region but positive and not statistically significant at the level of the Northern and Western region. In addition to previous papers on this field, this study adds the analysis between digitalization and the Spillover Index. In addition, while previous studies seek to identify the relationship between digitalization and sustainability at a single country level or region, this study presents the correlation analysis at the EU level and compares the results for each EU region. Following the results, our study gives arguments for reshaping the concept of sustainable development given that digitalization is becoming an essential business component.

Time-Frequency Connectedness between Shariah Indices in a Systemic Crisis Era

We examine the time- and frequency-domain spillover connectedness between regional and world Shariah indices. The spillover index approach is employed with data over the period from April 30, 2012, to May 9, 2022, for African, American, Asian, European, and world emerging and developed markets’ Shariah-based equity indices. The results indicate significant time- and frequency-dependent spillovers between Shariah indices. The world and developed markets’ Shariah indices transmit the greatest return spillover to their African and Asian counterparts, which act as net recipients of system spillovers. Our findings show that Asian Shariah assets are a perfect hedge against all relevant market shocks over the last decade. Our findings have implications for Shariah market regulators, investors, practitioners, and policymakers.

The spillover effect between Chinese crude oil futures market and Chinese green energy stock market

With the increasing severe pollution, the new energy industry is greatly favored by the government and investors. Using the static network connectedness method of Diebold and Yilmaz (2009, 2012, 2014) and the dynamic network connectedness approach of Antonakakis et al. (2020), this paper discusses the return and volatility spillover effects between China's crude oil futures market and 7 Chinese green energy stock markets. In terms of return spillover effects, we find firstly that Chinese green energy stock is able to dominate the price changes in the crude oil market, and the dominate role of natural gas stock market is stronger. Secondly, rather than changing the dominant role of the green energy stock market on crude oil futures market price changes, the outbreak of COVID-19 in 2020 strengthened that dominant role. For the volatility spillover effects, the results of static volatility spillover index show that the crude oil futures market volatility is mainly dominated by the green energy equity market, but the dynamic connectedness indices results show that the volatility in the international energy market can strengthen the dominant role of the crude oil futures on the volatility of the green energy stock market. Finally, we can find that both the outbreak of COVID-19 in 2020 and the online operation of the Chinese carbon trading market in 2021 can strengthen the dominant role of the green energy stock market on the crude oil futures market volatility.

Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets

The paper aims to analyze the contagion effect coming from the developed stock markets of the US and Germany to the emerging CEE stock markets of Romania, Czech Republic, Hungary, and Poland using daily data for the period April 2005–April 2021. The paper also captures the level of integration of these emerging stock markets by analyzing the volatility spillover phenomenon. The quantification of the contagion effect coming from the developed to the emerging stock markets consisted of an empirical analysis based on the DCC-GARCH (Dynamic Conditional Correlation) model. Through this multivariate model, the time-varying conditional correlations were analyzed, both in periods of normal economic development and in times of economic instability, when there was a significant increase in the correlation coefficients between developed and emerging stock market indices. Furthermore, the level of connectedness between these markets has been analyzed using the volatility spillover index developed by Diebold and Yilmaz. The empirical results surprised the high level of integration of the analyzed stock markets in Central and Eastern Europe, with the intensity of volatility transmission between these markets increasing significantly during times of crisis. All stock market indices analyzed show periods during which they transmit net volatility and periods during which they receive net volatility, indicating a bidirectional volatility spillover phenomenon. Mostly, the BET, PX, and WIG indices are net transmitters of volatilities, whereas the BUX index is net recipient, except during the COVID-19 crisis, when it transmitted net volatility to the other three indices. Finally, using a Markov switching-regime VAR approach with two regimes, we explored the contagion effect between emerging CEE and developed stock markets during the COVID-19 pandemic. The empirical results proved a shift around the outbreak of the health crisis, after which the high volatility regime dominates the CEE markets. The contagion effects from developed stock markets to emerging CEE markets significantly increased during the first stage of the health crisis.

Volatility spillover and hedging strategies between the European carbon emissions and energy markets

Much attention has been paid to the complex risk transmission between carbon and energy markets along with the increasing global financial market integration. This research thus uses the DCC-MVGARCH model and spillover index method to investigate volatility linkages between the European carbon emissions and energy markets. The results make it clear that there are indeed volatility correlations and bidirectional spillover effects for the above two markets. In particular, the volatility correlations and the spillover index dramatically change when global economic turbulence and political events occur. Apart from the strongest volatility correlation between coal and carbon markets, the volatility spillover effect from the renewable energy market to the carbon market is gradually increasing. The role of the carbon market is also changing: the net information recipient becomes a transmitter from phase II to phase IV. Therefore, our findings provide investors with flexible portfolio strategies by making full use of dynamic volatility linkages between the two markets. This research also gives a decision-making basis for market regulators to improve the carbon market's risk management mechanism. It means that regulators should pay close attention to potential market risk sources. Further policy recommendations are put forward in the conclusion section.

Measuring network linkages of housing prices: Evidence from the Guangdong-Hong Kong-Macao Greater Bay Area

In this paper, we examine the pattern of network linkages of housing prices across a group of neighboring cities in the Greater Bay Area (the GBA). Using monthly data of housing prices across 11 cities in the GBA from June 2013 to December 2020, we explore the contemporaneous causal relationships as well as cross-city housing market connectedness within the GBA. Our findings provide evidence for contemporaneous causality in housing prices across cities in the GBA. There is a core-periphery hierarchical structure of transmission mechanism for housing price shocks that are transmitted from core cities to key node cities within the GBA in contemporaneous time. Moreover, the spillover index indicates that cross-city connectedness is an important source of volatility in the housing markets in the GBA. However, the patterns of housing price connectedness behave differently across categories of cities in the GBA. In addition, using the Quadratic Assignment Procedure (QAP) analysis, we find that similarities in economic openness and urbanization contribute to the strong linkages of regional housing markets in the GBA.

Foreign exchange market return spillovers and connectedness among African countries

This paper examines the foreign exchange return shock spillovers and network connectedness among African countries during crisis periods using (Diebold & Yilmaz, 2012; 2014; 2016) which is based on generalized VAR and network theory between June 2004 and June 2021. Overall, the study found a low system-wide spillover connectedness among African foreign exchange markets. However, the total systemic spillover index increased during the eurozone sovereign debt crisis followed by global financial crisis, indicating evidence of contagion effects. This offers good diversification opportunities in the African currency market during crisis periods. The study also found no significant evidence of spillover effects among African currencies. Nonetheless, the network connectedness analysis found a positive significant pairwise return spillovers from the South African rand, Moroccan dirham and the CFA francs to Botswana pula, and from Moroccan dirham to CFA francs and South African rand. Furthermore, the study found South African rand, Moroccan dirham and CFA francs as the most significant net-transmitter of return shocks to other currencies whiles the Kenyan shilling and Botswana pula are the net-receivers of return shocks from other currencies. These results have implications for African central banks interventions in stabilizing their exchange rates to facilitate intra and inter-African trade and for international portfolio investors in managing their foreign exchange risk exposures.

Spillovers and hedging between US equity sectors and gold, oil, islamic stocks and implied volatilities

We investigate the spillovers and hedging between US equity sector returns and oil, gold, Islamic stocks, and the implied volatilities of oil (OVX) and US stock market (VIX) based on spillover indexes and portfolio hedging methods. The spillover results indicate that the 30-day forward-looking market expectations of VIX most strongly influence all 10 US equity sectors’ returns. The healthcare and information technology (real estate and utilities) sectors are the most (least) affected by VIX. The US Islamic market index is the highest spillover transmitter (receiver) to (from) US sectoral returns compared to gold, oil, and OVX. The highest transmitters to and receivers of spillover from all other sectors are the industrial, consumer discretionary, and basic materials sectors. The real estate and utilities are mainly net spillover receiver sectors. Finally, the portfolio hedging results show that gold, oil, and US Islamic stocks most effectively hedge the risk of the real estate equity sector. Gold also emerges as the most effective hedge for the financial sector.

Spreading of cross-market volatility information: Evidence from multiplex network analysis of volatility spillovers

We propose a multiplex network including layers of realized variance (RV), implied variance (IV), and variance risk premium (VRP) to investigate the volatility information transmission among 18 global financial markets through the spillover index in the variance decomposition framework. We innovatively study the connectedness of global volatility from aspects of RV, IV, and VRP to portray the interrelation between market volatility and investor sentiments. Upon inspecting and comparing static and dynamic topological characteristics on each layer, we find that information transmission mechanism is different among the three layers. Spillover effects are observed to be the strongest on the IV layer in the long term, while the most evident spillover shocks are observed on the VRP layer in the short term. At the market level, European and the US markets are the main spillover emitters, while Asian markets primarily are spillover recipients. Our study provides valuable insights on global risk management and prevention for portfolio managers and policy makers.

Extreme time-varying spillovers between high carbon emission stocks, green bond and crude oil: Evidence from a quantile-based analysis

This paper combines quantile regression with time-varying vector autoregressive (TVP − VAR) model to study extreme spillover effects among high carbon emission stocks, green bond and WTI crude oil from April 21, 2010 to March 25, 2022. The results display a static total spillover index of approximately 49% at the conditional mean and conditional median estimates; while about 83% under the left tail and right tail estimates. The quantile-based spillover model is better than the mean-based one, because the former better captures the risk contagion mechanism under extreme market conditions. In addition, under extreme market conditions, green bond and WTI crude oil are net receivers of systemic shocks, while the remaining markets analyzed are net transmitters. The connectedness is time-varying in all cases, but the tail is less volatile. The analysis of relative tail dependence suggests the existence of asymmetric behavior, which implies different spillover effects in bullish and bearish markets. In addition, the European sovereign debt crisis has a much larger impact on spillovers under bearish markets than under bullish markets.

On GVC and innovation: the moderating role of policy

This paper empirically investigates the association between global value chains (GVC) participation and countries’ innovation performance. Highlighting the learning effect of foreign knowledge embedded in imported intermediate goods counters the argument that GVC participation is biased towards developed countries with skilled labor abundance. We construct a GVC knowledge spillovers index by merging data on GVC from the EORA26 dataset with R&D of the trade partner. Results show positive association between the GVC knowledge spillovers index and innovation measured by resident patent per capita. Likewise, we show that trade policy, intellectual property rights’ agreements, and competition policy constitute moderating factors in the nexus between GVC participation and innovation. Our results remain robust when we use alternative measures for our two variables of interest and when we control for foreign knowledge spillovers in imported final goods.

Asymmetric relationship between green bonds and Sukuk markets: The role of global risk factors

This study investigates the asymmetric connectedness and spillover effects between two ethical fixed-income assets (Sukuk and green bonds) with regard to global risk factors using a sample of 15 Sukuk markets and green bond indices. This complex network allows us to examine the extreme risk spillover and interlinkages across green bonds and Sukuk under different market conditions, captures sudden upward changes in the total and net spillover indices and hence, serves as an alerting system for any impending crisis in relation to global risk factors. Empirical results indicate a persistency feature in the connectedness between Hong Kong and Malaysian, and UK and Nigerian Sukuk markets under different market conditions. More importantly, Sukuk and green bond markets are not largely affected by global risk factors in the middle, upper and lower quantiles. Findings from the portfolio analysis show that Sukuk is effective in hedging the risks of green bonds and global factors. These results of potential diversification characteristics and risk reduction benefits are robust and hold during the Covid-19 pandemic period. Finally, our findings are of paramount importance for investors who are interested in ethical investments as well as policymakers in order to maintain a stable and sound financial system.

Impact of geopolitical risk on the volatility spillovers among G7 and BRICS stock markets

Geopolitical risk (GPR) plays an important role in the international financial interactions. Previous studies have mostly analyzed the impact of the GPR on the return or volatility of financial assets, and less attention has been paid on the connection among international stock markets. Therefore, this study attempts to explore the impact of GPR on the volatility spillovers among G7 and BRICS stock markets using the impulse response function. To be specific, TVP-VAR model is utilized to capture the dynamic volatility spillovers among 12 stock markets, and we obtain the total and directional spillover indexes. Then, impulse response function based on the VAR model is applied to capture the dynamic effect of GPR on the spillover series. Based on the weekly price data ranging from August 16, 2002 to April 10, 2023, we find that the volatility spillover index increases when there are large shocks to the market such as war, financial crisis and COVID-19. In addition, the impact of GPR on the total spillover index is negative in the early and late periods, and it shows a more significant positive effect in the middle period. These results reflect the dynamic impact of GPR on the connection among international stock markets, which is essential for the international financial risk management.

(Quantile) Spillover Indexes: simulation-based evidence, confidence intervals and a decomposition

(Quantile) Spillover Indexes: simulation-based evidence, confidence intervals and a decomposition

Does the Spillover Index Respond to Adverse Shocks? A Bootstrap-Based Probabilistic Analysis

Does the Spillover Index Respond to Adverse Shocks? A Bootstrap-Based Probabilistic Analysis

Price spillovers between foreign exchange rate markets in Asean countries: Evidence from Covid-19 crisis and Russia-Ukraine war

This study aims to evaluate the spillover effects between the foreign exchange rate markets of ASEAN-5 countries (Indonesia, Malaysia, Singapore, Thailand, and Vietnam) using the spillover index proposed by Diebold and Yilmaz (2014). The results indicate that price spillovers between exchange rate markets are relatively low and tend to increase during recent crises, including COVID-19 and the Russia-Ukraine war. This implies that crises have caused price contagion effects. Due to their reliance on the markets in Vietnam, Singapore, and Malaysia, the forex markets in Indonesia and Thailand will not be viewed as safe havens to hedge. These spillover effects reveal that price shocks significantly impact the ASEAN-5 markets, which means that there is a contagion risk in the currency markets. These findings have crucial implications for investors and policymakers dealing with currency markets, such as predicting portfolio market risk and identifying the existence of the diversification benefits of exchange rate markets.