Share:


Investigating abnormal volatility transmission patterns between emerging and developed stock markets: a case study

    Cristi Spulbar Affiliation
    ; Jatin Trivedi Affiliation
    ; Ramona Birau Affiliation

Abstract

The main aim of this paper is to investigate volatility spillover effects, the impact of past volatility on present market movements, the reaction to positive and negative news, among selected financial markets. The sample stock markets are geographically dispersed on different continents, respectively North America, Europe and Asia. We also investigate whether selected emerging stock markets capture the volatility patterns of developed stock markets located in the same region. The empirical analysis is focused on seven developed stock market indices, i.e. IBEX35 (Spain), DJIA (USA), FTSE100 (UK), TSX Composite (Canada), NIKKEI225 (Japan), DAX (Germany), CAC40 (France) and five emerging stock market indices, i.e. BET (Romania), WIG20 (Poland), BSE (India), SSE Composite (China) and BUX (Hungary) from January 2000 to June 2018. The econometric framework includes symmetric and asymmetric GARCH models i.e. EGARCH and GJR which are performed in order to capture asymmetric volatility clustering, interdependence, correlations, financial integration and leptokurtosis. Symmetric and asymmetric GARCH models revealed that all selected financial markets are highly volatile, including the presence of leverage effect. The stock markets in Hungary, USA, Germany, India and Canada exhibit high positive volatility after global financial crisis.

Keyword : volatility spillovers, developed stock markets, emerging stock markets, GARCH models, correlation

How to Cite
Spulbar, C. ., Trivedi, J. ., & Birau, R. . (2020). Investigating abnormal volatility transmission patterns between emerging and developed stock markets: a case study. Journal of Business Economics and Management, 21(6), 1561-1592. https://doi.org/10.3846/jbem.2020.13507
Published in Issue
Oct 1, 2020
Abstract Views
239
PDF Downloads
127
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Ahmed, A. E. M., & Suliman, S. Z. (2011). Modeling stock market volatility using GARCH models evidence from Sudan. International Journal of Business and Social Science, 2(23 Special Issue), 114–128.

Ahmed, R., Vveinhardt, J., Štreimikienė, D., Ghauri, S., & Ashraf, M. (2018). Stock returns, volatility and mean reversion in emerging and developed financial markets. Technological and Economic Development of Economy, 24(3), 1149–1177. https://doi.org/10.3846/20294913.2017.1323317

Aktan, B., Korsakienė, R., & Smaliukiene, R. (2010). Time‐varying volatility modelling of Baltic stock Markets. Journal of Business Economics and Management, 11(3), 511–532. https://doi.org/10.3846/jbem.2010.25

Alberg, D., Shalit, H., & Yosef, R. (2008). Estimating stock market volatility using asymmetric GARCH models. Applied Financial Economics, 18(5), 1201–1208. https://doi.org/10.1080/09603100701604225

Baele, L. (2003). Volatility spillover effects in European equity markets (CentER Discussion Paper; Vol. 2003–114). SSRN. https://doi.org/10.2139/ssrn.302851

Bahadur, G. C. S., Kothari, R., & Thagurathi, R. (2017). Volatility spillover effect in Indian stock market. Janapriya Journal of Interdisciplinary Studies, 5, 83–101. https://doi.org/10.3126/jjis.v5i0.17842

Bala, D. A., & Takimoto, T. (2017). Stock markets volatility spillovers during financial crises: A DCCMGARCH with skewed-t density approach. Borsa Istanbul Review, 17(1), 25–48. https://doi.org/10.1016/j.bir.2017.02.002

Basso, A., & Ferretti, P. (1994). Stock returns: An analysis of the Italian market with GARCH models. In Operations research models in quantitative finance. Contributions to management science (pp. 187–209). Physica-Verlag HD. https://doi.org/10.1007/978-3-642-46957-2_10

Baur, D. G. (2003). Testing for contagion – mean and volatility contagion. Journal of Multinational Financial Management, 13(4–5), 405–422. https://doi.org/10.1016/S1042-444X(03)00018-5

Będowska-Sójka, B., & Echaust, K. (2019). Commonality in liquidity indices: The emerging European stock markets. Systems, 7(2), 24. https://doi.org/10.3390/systems7020024

Beirne, J., Caporale, G. M., Schulze‐Ghattas, M., & Spagnolo, N. (2013). Volatility spillovers and contagion from mature to emerging stock markets. Review of International Economics, 21(5), 1060–1075. https://doi.org/10.1111/roie.12091

Bekaert, G, Harvey, C. R., & Ng, A. (2005). Market integration and contagion. Journal of Business, 78(1), 39–69. https://doi.org/10.1086/426519

Bhar, R., & Nikolova, B. (2007). Analysis of mean and volatility spillovers using BRIC countries, regional and world equity index returns. Journal of Economic Integration, 22(2), 369–381. https://doi.org/10.11130/jei.2007.22.2.369

Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity. Journal Economic, 31(3), 307–327. https://doi.org/10.1016/0304-4076(86)90063-1

Bonfiglioli, A., & Favero, C. A. (2005). Explaining co-movements between stock markets: The case of US and Germany. Journal of International Money and Finance, 24(8), 1299–1316. https://doi.org/10.1016/j.jimonfin.2005.08.016

Bonga-Bonga, L. (2018). Uncovering equity market contagion among BRICS countries: An application of the multivariate GARCH model. The Quarterly Review of Economics and Finance, 67, 36–44. https://doi.org/10.1016/j.qref.2017.04.009

Bonilla, C. A., & Sepúlveda, J. (2011). Stock returns in emerging markets and the use of GARCH models. Applied Economics Letters, 18(14), 1321–1325. https://doi.org/10.1080/13504851.2010.537615

Calvo, S., & Reinhart, C. (1996). Capital flows to Latin America: Is there evidence of contagion effects? In G. A. Calvo, M. Goldstein, & E. Hochreiter (Eds.), Private capital flows to emerging markets after the Mexican Crisis (pp. 151–171). Peterson Institute for International Economics, Washington, DC.

Chan, W. H., & Feng, L. (2008). Extreme news events, long-memory volatility and time varying risk premia in stock market returns. SSRN. https://doi.org/10.2139/ssrn.1183173

Chang, C. L., & McAleer, M. (2017). The correct regulatory condition and interpretation of asymmetry in EGARCH. Economics Letters, 161(C), 52–55. https://doi.org/10.1016/j.econlet.2017.09.017

Chiang, T. C., Bang, N. J., & Huimin, L. (2007). Dynamic correlation analysis of financial contagion: Evidence from Asian markets. Journal of International Money Finance, 26(7), 1206–1228. https://doi.org/10.1016/j.jimonfin.2007.06.005

Chitkasame, T., & Tansuchat, R. (2019). An analysis of contagion effect on ASEAN stock market using multivariate Markov switching DCC GARCH. Thai Journal of Mathematics (Special Issue: Structural Change Modeling and Optimization in Econometrics), 135–152.

Choudhry, T. (1996). Stock market volatility and the crash of 1987: Evidence from six emerging markets. Journal of International Money and Finance, 15(6), 969–981. https://doi.org/10.1016/S0261-5606(96)00036-8

Chowdhury, A. H., & Arefin, M. K. (2017). Modelling co-movement of different sectors in Dhaka Stock Exchange (DSE) using asymmetric BVAR-GARCH models. Journal of Finance and Economics, 5(3), 105–117. https://doi.org/10.12691/jfe-5-3-3

Chua, C. L., & Tsiaplias, S. (2019). Information flows and stock market volatility. Journal of Applied Econometrics, 34(1), 129–148. https://doi.org/10.1002/jae.2649

Dedi, L., Yavas, B. F., & McMillan, D. (2016). Return and volatility spillovers in equity markets: An investigation using various GARCH methodologies. Cogent Economics & Finance, 4(1), 1266788. https://doi.org/10.1080/23322039.2016.1266788

Domowitz, I., Glen, J., & Madhavan, A. (1998). International cross-listing and order ‡ow migration: Evidence from an emerging market. Journal of Finance, 53(6), 2001–2027. https://doi.org/10.1111/0022-1082.00081

Dornbusch, R., Park, Y. C., & Claessens, S. (2000). Contagion: Understanding how it spreads. The World Bank Research Observer, 15(2), 177–197. https://doi.org/10.1093/wbro/15.2.177

Dutta, P., Noor, M. H., & Dutta, A. (2017). Impact of oil volatility shocks on global emerging market stock returns. International Journal of Managerial Finance, 13(5), 578–591. https://doi.org/10.1108/IJMF-03-2017-0039

Dutta, A. (2014). Modelling volatility: Symmetric or asymmetric GARCH models? Journal of Statistics: Advances in Theory and Applications, 12(2), 99–108.

Engle, R., Ito, T., & Lin, W. (1990). Meteor showers or heat waves? Heteroskedastic intra-daily volatility in the foreign exchange market. Econometrica, 58(3), 525–542. https://doi.org/10.2307/2938189

Engle, R. F. (2001). GARCH 101: The use of ARCH/GARCH models in applied econometrics. Journal of Economic Perspectives, 15(4), 157–168. https://doi.org/10.1257/jep.15.4.157

Fasanya, I. O., & Akinde, M. A. (2019). Volatility transmission in the Nigerian financial market. The Journal of Finance and Data Science, 5(2), 99–115. https://doi.org/10.1016/j.jfds.2019.01.003

Fleming, J., Kirby, C., & Ostdiek, B. (1998). Information and volatility linkages in the stock, bond, and money markets. Journal of Financial Economics, 49(1), 111–137. https://doi.org/10.1016/S0304-405X(98)00019-1

Forbes, K. J., & Rigobon, R. (2002). No contagion, only interdependence: Measuring stock market comovements. Journal of Finance, 57(5), 2223–2261. https://doi.org/10.1111/0022-1082.00494

Giovannetti, G., & Velucchi, M. (2013). A spillover analysis of shocks from US, UK and China on African financial markets. Review of Development Finance, 3(4), 169–179. https://doi.org/10.1016/j.rdf.2013.10.002

Girard, E., & Biswas, R. (2007). Trading volume and market volatility: Developed versus emerging stock markets. The Financial Review, 42(3), 429–459. https://doi.org/10.1111/j.1540-6288.2007.00178.x

Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. Journal of Finance, 48(5), 1779–1801. https://doi.org/10.1111/j.1540-6261.1993.tb05128.x

Gokcan, S. (2000). Forecasting volatility of emerging stock markets: Linear versus non‐linear GARCH models. Journal of Forecasting, 19(6), 499–504. https://doi.org/10.1002/1099-131X(200011)19:6<499::AID-FOR745>3.0.CO;2-P

Hamao, Y., Masulis, R., & Ng, V. (1990). Correlations in price changes and volatility across international stock markets. The Review of Financial Studies, 3(2), 281–307. https://doi.org/10.1093/rfs/3.2.281

Hassan, S. A. (2017). A time series analysis of major indexes using GARCH model with regime shifts. International Journal of Financial Research, 8(4), 127–133. https://doi.org/10.5430/ijfr.v8n4p127

Herrera, F. L., Salgado, R. J. S, & Ake, S. C. (2015). Volatility dependence structure between the Mexican Stock Exchange and the World Capital Market. Investigación Económica, 74(293), 69–97. https://doi.org/10.1016/j.inveco.2015.06.001

Hol, E. M. J. H. (2003). The stochastic volatility in mean model: Empirical evidence from international stock markets. In Dynamic Modeling and Econometrics in Economics and Finance: Vol. 6. Empirical Studies on Volatility in International Stock Markets. (pp. 24–57). Springer. https://doi.org/10.1007/978-1-4757-5129-1

Hung, N. T. (2019). Return and volatility spillover across equity markets between China and Southeast Asian countries. Journal of Economics, Finance and Administrative Science, 24(47), 66–81. https://doi.org/10.1108/JEFAS-10-2018-0106

Jain, P., & Sehgal, S. (2019). An examination of return and volatility spillovers between mature equity markets. Journal of Economics and Finance, 43(1), 180–210. https://doi.org/10.1007/s12197-018-9442-1

Jebran, K., Chen, S., Ullah, I., & Mirza, S. S. (2017). Does volatility spillover among stock markets varies from normal to turbulent periods? Evidence from emerging markets of Asia. The Journal of Finance and Data Science, 3(1–4), 20–30. https://doi.org/10.1016/j.jfds.2017.06.001

Kenourgios, D. (2014). On financial contagion and implied market volatility. International Review of Financial Analysis, 34, 21–30. https://doi.org/10.1016/j.irfa.2014.05.001

Kumar, S., Moon Haque, M., & Sharma, P. (2018). Volatility spillovers across major emerging stock markets. Asia-Pacific Journal of Management Research and Innovation, 13(1–2), 13–33. https://doi.org/10.1177/2319510X17740043

Leung, H., Schiereck, D., & Schroeder, F. (2017). Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises. Economic Modelling, 61, 169–180. https://doi.org/10.1016/j.econmod.2016.12.011

Li, Y., & Giles, D. E. (2015). Modelling volatility spillover effects between developed stock markets and Asian emerging stock markets. The International Journal of Finance and Economics, 20(2), 155–177. https://doi.org/10.1002/ijfe.1506

Lin, Z. (2018). Modelling and forecasting the stock market volatility of SSE Composite Index using GARCH models. Future Generation Computer Systems Journal, 79(P3), 960–972. https://doi.org/10.1016/j.future.2017.08.033

Liu, H., C., & Hung, J. C. (2010). Forecasting S&P – 100 stock index volatility: The role of volatility asymmetry and distributional assumption in GARCH models. Expert Systems with Applications, 37(7), 4928–4934. https://doi.org/10.1016/j.eswa.2009.12.022

Majdoub, J., & Sassi, S. B. (2017). Volatility spillover and hedging effectiveness among China and emerging Asian Islamic equity indexes. Emerging Markets Review, 31, 16–31. https://doi.org/10.1016/j.ememar.2016.12.003

Mathur, S., Chotia, V., & Rao, N. V. M. (2016). Modelling the impact of Global Financial Crisis on the Indian stock market through GARCH models. Asia-Pacific Journal of Management Research and Innovation, 12(1), 11–22. https://doi.org/10.1177/2319510X16650056

McAleer, M., Hoti, S., & Chan, F. (2009). Structure and asymptotic theory for multivariate asymmetric conditional volatility. Econometric Reviews, 28(5), 422–440. https://doi.org/10.1080/07474930802467217

Miralles-Marcelo, J. L., Miralles-Quirós, J. L., & del Mar Miralles-Quirós, M. (2013). Multivariate GARCH models and risk minimizing portfolios: The importance of medium and small firms. The Spanish Review of Financial Economics, 11(1), 29–38. https://doi.org/10.1016/j.srfe.2013.03.001

Morales-Zumaquero, A., & Sosvilla-Rivero, S. (2016). Volatility spillovers between foreign-exchange and stock markets (Bath Economics Research Papers, No. 58/17). SSRN. https://doi.org/10.2139/ssrn.2897481

Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59(2), 347–370. https://doi.org/10.2307/2938260

Patel, S., & Sarkar, A. (1998). Crises in developed and emerging stock markets. Financial Analysts Journal, 54(6), 50–61. https://doi.org/10.2469/faj.v54.n6.2225

Quoreshi, A. M. M. S., Uddin, R., & Jienwatcharamongkhol, V. (2019). Equity market contagion in return volatility during Euro Zone and Global Financial Crises: Evidence from FIMACH model. Journal of Risk and Financial Management, 12(2), 94. https://doi.org/10.3390/jrfm12020094

Raczko, M. A. (2015). Volatility contagion: New evidence from market pricing of volatility risk (Bank of England Working Paper No. 552). SSRN. https://doi.org/10.2139/ssrn.2667682

Rao, R., Kanagaraj, S. V. A., & Tripathy, N. (2008). Does individual stock futures affect stock market volatility in India? Journal of the Indian Institute of Economics, 50(1), 125–135.

Rejeb, A. B., & Boughrara, A. (2015). Financial integration in emerging market economies: Effects on volatility transmission and contagion. BorsaIstanbul Review, 15(3), 161–179. https://doi.org/10.1016/j.bir.2015.04.003

Roni, B., Abbas, G., & Wang, S. (2018). Return and volatility spillovers effects: Study of Asian emerging stock markets. Journal of Systems Science and Information, 6(2), 97–119. https://doi.org/10.21078/JSSI-2018-097-23

Ross, S. A. (1989). Information and volatility: The no-arbitrage martingale approach to timing and resolution irrelevancy. Journal of Finance, 44(1), 1–17. https://doi.org/10.1111/j.1540-6261.1989.tb02401.x

Sentana, E. (2018). Volatility, diversification and contagion (CEPR Discussion Papers 12824). Centro de estudios monetarios y financieros of Madrid, Spain.

Silvia, A., Zulpahmi, & Sumardi. (2019). Spillovereffect of Islamic stock markets in Asia. European Research Studies Journal, 22(2), 28–40. https://doi.org/10.35808/ersj/1424

Slimane, F. B., Mehanaoui, M., & Kazi, I. A. (2013). How does the financial crisis affect volatility behavior and transmission among European stock markets? International Journal of Financial Studies, 1(3), 81–101. https://doi.org/10.3390/ijfs1030081

Spulbar, C., & Birau, R. (2019). Emerging research on monetary policy, banking, and financial markets. IGI Global, USA. https://doi.org/10.4018/978-1-5225-9269-3

Srinivasan, P. (2011). Modeling and forecasting the stock market volatility of S&P 500 index using GARCH models. The IUP Journal of Behavioral Finance, 8(1), 51–69.

Taly, I. (2015). Study on return and volatility spillover effects among stock, CDS, and foreign exchange markets in Korea. Journal of East Asian Economic Integration, 19(3), 275–322. https://doi.org/10.11644/KIEP.JEAI.2015.19.3.299

Tao, J., & Green, C. J. (2012). Asymmetries, causality and correlation between FTSE100 spot and futures: A DCC-TGARCH-M analysis. International Review of Financial Analysis, 24(C), 26–37. https://doi.org/10.1016/j.irfa.2012.07.002

Taufiq, H., Nassir, A.B., & Shamsher, M. (2006). The heat waves or meteor showers hypothesis: Test on selected Asian emerging and developed stock markets. Investment Management and Financial Innovations, 3(1), 120–131.

Tran, T. B. N. (2018). Contagion risks in emerging stock markets: New evidence from Asia and Latin America. Journal of Risk and Financial Management, 11(4), 89. https://doi.org/10.3390/jrfm11040089

Valls, N., & Chuliá, H. (2014).Volatility transmission between the stock and currency markets in emerging Asia: The impact of the global financial crisis. (Working Paper 2014/31 1/26, pp. 1–26). Research Institute of Applied Economics.

Vidanage, T. N., Carmignani, F., & Singh, T. (2017). Predictability of return volatility across different emerging capital markets: Evidence from Asia. South Asian Journal of Macroeconomics and Public Finance, 6(2), 157–177. https://doi.org/10.1177/2277978717727172

Withanage, Y., & Jayasinghe, P. (2017). Volatility spillovers between South Asian stock markets: Evidence from Sri Lanka, India and Pakistan. Sri Lanka Journal of Economic Research, 5(1), 79–94. https://doi.org/10.4038/sljer.v5i1.59

Xu, Y., Taylor, N., & Lu, W. (2018). Illiquidity and volatility spillover effects in equity markets during and after the global financial crisis: An MEM approach (Cardiff Economics Working Papers E2018/6). Cardiff University, Cardiff Business School, Economics Section. https://doi.org/10.1016/j.irfa.2018.01.011

Yu, Y., Wang, Y., & Yi, R. (2019). Risk transmission beyond financial crises: Volatility spillovers and spillbacks between SMICs and the U.S. SSRN. https://doi.org/10.2139/ssrn.3446629