Unidirectional Volatility Spillover Research Articles

Volatility Spillovers between Stock and Currency Markets: Evidence from Emerging Eastern Europe

The purpose of this study is in three folds. First we look at the linkage between Eastern European emerging equity markets and Russia, second we investigate the relationship among the currency markets of Poland, Hungry, Russia and Czech Republic. Finally, we examine the interdependence between Emerging Eastern European and Russian equity and currency markets. We estimate a bivariate GARCH-BEKK model proposed by Engle and Kroner (1995) using weekly returns. We find the evidence of direct linkage between the equity markets, both in regards of returns and volatility, as well as in currency markets. While analyzing the relationship between currency and stock markets we found unidirectional volatility spillovers from currency to stock markets. Results show clear evidence of Eastern European markets integration within the region and with Russia as well.

Applying the Realized Covariation to Detecting Volatility Spillovers, Risk Hedging, and Asset Allocation

This paper examines the gains of using high-frequency data in detecting volatility spillovers, risk hedging, and asset allocation. In particular, a realized covariation method based on intra-day US and Japan index funds data is compared with a bi-variate GARCH method based on the same data sampled at daily frequency. While the GARCH method generally detects no volatility spillovers, the realized covariation method reveals significant uni-directional volatility spillovers from the US to Japan index funds. In addition, the realized covariation method outperforms the GARCH method in terms of minimizing portfolio risks and maximizing portfolio return-to-risk ratios. The results also suggest that a hedging strategy based on the realized covariation method requires less hedging capital and has lower turnover rates than the GARCH hedging strategy.

International linkages of the Chinese stock exchanges: a multivariate GARCH analysis

This paper examines the linkages between the two emerging stock exchanges in mainland China and the established markets in Hong Kong and in the US by a multivariate GARCH approach. We use a four-variable asymmetric GARCH in the line of the BEKK model proposed by Engle and Kroner (1995) to account for the regularities documented in the share price indices and test for the transmission of returns and volatility across the markets. While we do not find any evidence of a direct linkage between the stock exchanges in mainland China and the US market, we find evidence of uni-directional volatility spillovers from the stock exchange in Hong Kong to those in Shanghai and Shenzhen. However, the magnitude of the volatility linkages between the mainland and Hong Kong is small, indicating a weak integration of the Chinese stock exchanges with the regional developed market. The implication of the weak integration is that overseas investors will benefit from the reduction of diversifiable risk, and thus total portfolio...

Testing for volatility spillover between the British pound and the euro

This paper examines volatility spillover between two nominal U.S. dollar exchange rates: the British pound and the euro. Using the residual cross-correlation approach, we observe that the euro Granger-causes the British pound in variance, whereas the British pound does not Granger-cause the euro in variance. Our findings support unidirectional volatility spillover from the euro to the British pound; thus, the euro volatility has a one-sided impact on the British pound volatility. Moreover, the findings suggest that euro traders succeed in the efficient processing of information derived from the British pound.

Dynamic Linkages of Interest Rates Within Ems: Implications for the 'German Dominance' Hypothesis and Monetary Policy

This paper explores the nature of the interaction of short- and long-term interest rates within the European Monetary System for the period 1979-1999. The empirical examination centers on the 'German Dominance' hypothesis which purports that German interest rates should convey valuable information to the other EMS countries' interest rates behavior. In other words, it is assumed that there exist uni-directional volatility spillovers from the Bundesbank to the other countries' central banks. The methodology employed is the multivariate framework of the EGARCH model which is capable of capturing the potential asymmetries and other anomalies of the volatility transmission mechanism. The results do not support the dominance hypothesis, in a strict sense, since Germany's monetary policy is influenced by the actions of its partners, especially since 1990. Finally, the implications for a European Union monetary policy are highlighted.

Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan.