Measuring volatility spillovers between developed and Southeast Asian emerging stock markets: a multivariate garch approach
Main Article Content
Abstract
In this paper, we measure volatility spillovers among eleven stock markets, including five developed markets (the United States, Japan, Germany, the United Kingdom, Hong Kong) and six Southeast Asian developing markets (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam) over the 25-year period from January 1, 1993 to December 31, 2017. Employing the GARCH-DCC model and non-parametric sign tests on the correlations between developed markets and emerging markets, we find that correlations between developed markets and the Southeast Asian markets have risen sharply during periods of crisis, indicating the existence of volatility spillover effects from the developed markets to emerging ones. Full sample analysis suggests that volatility spillover from Japanese and the UK markets to the Southeast Asian emerging markets is stronger and more apparent than those transmitted from the US and Germany markets. Sub-sample analysis is able to identify the markets transmitting shocks to others. Results also suggest that Vietnam market is not fully integrated to the regional and global markets.
Article Details
Keywords
volatility spillovers, GARCH-DCC model, emerging market, financial crisis
References
References
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2. Amadeus Wennström, “Volatility Forecasting Performance: Evaluation of GARCH type volatility models on Nordic equity indices”, June 11 2014.s
3. B.B. Mandelbrot, 1963. The Variation of Certain Speculative Prices. The Journal of Business Vol. 36, No. 4, pp. 394-419.
4. Black, F., 1976, “Studies of Stock Price Volatility Changes”, Proceedings of the Business and Economics Section of the American Statistical Association, 177–181.
5. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307-327.
6. Bouaziz, C. M., & Selmi, N., & Boujelbene, Y. (2012). Contagion effect of the subprime financial crisis: Evidence of DCC multivariate GARCH models, in European Journal of Economics, Finance and Administrative Sciences, January 2012
7. Brooks, C. (2002). Introductory econometrics for finance. New York: Cambridge University Press.
8. Celık, S. (2012). The more contagion effect on emerging markets: The evidence of DCC-GARCH model, in Economic Modelling, Elsevier, vol. 29(5), pages 1946-1959.
9. Caporale, G. M., Pittis, N., & Spagnolo, N. (2006). Volatility transmission and financial crises. Journal of Economics and Finance, 30(3), 376-390.
10. Cho, J. H., & Parhizgari, A. M. (2008). East Asian financial contagion under DCCGARCH. International Journal of Banking and Finance, 6(1), 17-30.
11. Christie, A., 1982, “The Stochastic Behavior of Common Stock Variances: Value, leverage, and Interest Rate Effects”, Journal of Financial Economics 10, 407–432.
12. Dedi, L., & Yavas, F.B., (2017). Equity Returns and Volatilities Before and After the 2007-08 Financial Crisis in Zagreb International Review of Economics and Business 20(1):65-79 • May 2017
13. Diebold, F. X., & Yilmaz, K. (2009). Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets in The Economic Journal 119(534):158-171 • January 2009
14. Diebold, F. X., & Yilmaz, K. (2012). Better to Give Than to Receive: Predictive Directional Measurement of Volatility Spillovers in International Journal of Forecasting 28(1) • March 2010
15. E.F. Fama, 1965. The behavior of stock-market prices. The Journal of Business Vol. 38, pp. 34-105
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17. Engle, R. F., Ng, V. K., 1993. Measuring and testing the impact of news on volatility. The Journal of Finance 48, 1749–1778.
18. Engle, R. F., & Sheppard, K. (2001). Theoretical and empirical properties of dynamic conditional correlation multivariate GARCH (No. w8554). National Bureau of Economic Research.
19. Engle, R. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339-350.
20. Fernandez-Izquierdo, A., & Lafuente, J. A. (2004). International transmission of stock exchange volatility: Empirical evidence from the Asian crisis. Global Finance Journal, 15(2), 125-137.
21. Forbes, K., & Rigobon, R. (1999). Measuring contagion: Conceptual and empirical issues, mimeo, MIT.
22. Forbes, K., & Rigobon, R. (2002). No contagion, only interdependence: Measuring stock market co-movement. Journal of Finance, 57, 2223–2261.
23. Hamao, Y, R W Masulis and V Ng (1990): “Correlations in Price Changes and Volatility Across International Stock Markets”. Review of Financial Studies, 3, pp. 281-307.
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31. Nelson, D. B., 1991. Conditional heteroskedasticity in asset returns: A new approach.
Econometrica 59, 347–370.
32. Ng, A., (2000) Volatility spillover effects from Japan and the US to the Pacific-Basin. Journal of International Monetary and Finance 19, 207-233.
33. Orskaug, E. (2009). Multivariate DCC-GARCH Model: With Various Error
Distributions (Master’s thesis, Institutt for matematiske fag).
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35. Rigobon, R. (2016). Working Paper Series: Contagion, spillover and interdependence. No 1975, representing the views of the European Central Bank (ECB).
36. Savva, C., & Osborn, D., & Gill, L. (2009). Spillovers and correlations between US and major European stock markets: the role of the euro, in Applied Financial Economics, 2009, vol. 19, issue 19, 1595-1604.
37. Sok-Gee, C., Karim, M. A., & Karim, M. A. (2010). Volatility spillovers of the major stock markets in ASEAN-5 with the US and Japanese stock markets. International Research Journal of Finance and Economics, 44, 161-72.
38. Solnik, B., & Boucrelle, C., & Fur, L. Y. (1996). International Market Correlation and Volatility, in Financial Analysts Journal 52(5):17-3.
39. Theodossiou, P., & Lee, U. (1993). Mean and volatility spillovers across major national stock markets: further empirical evidence. Journal of Financial Research, 16(4), 337-350.
40. Tho, T., & Lam, H. (2015). Spillovers between stock market and foreign exchange market in Vietnam, Journal of Development and Intergration, No. 21 (31) MarApr/2015, 34-39.
41. Worthington, A., & Higgs, H. (2004). Transmission of equity returns and volatility in Asian developed and emerging markets: A multivariate GARCH analysis. International Journal of Finance & Economics, 9(1), 71-80.
42. Yilmaz, K. (2009). Return and volatility spillovers among the East Asian equity markets. Journal of Asian Economics 21 (3), 304-313
1. Akhtaruzzaman, M., Shamsuddin, A., & Easton, S. (2014). Dynamic correlation analysis of spill-over effects of interest rate risk and return on Australian and US financial firms. Journal of International Financial Markets, Institutions and Money, 31, 378-396.
2. Amadeus Wennström, “Volatility Forecasting Performance: Evaluation of GARCH type volatility models on Nordic equity indices”, June 11 2014.s
3. B.B. Mandelbrot, 1963. The Variation of Certain Speculative Prices. The Journal of Business Vol. 36, No. 4, pp. 394-419.
4. Black, F., 1976, “Studies of Stock Price Volatility Changes”, Proceedings of the Business and Economics Section of the American Statistical Association, 177–181.
5. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307-327.
6. Bouaziz, C. M., & Selmi, N., & Boujelbene, Y. (2012). Contagion effect of the subprime financial crisis: Evidence of DCC multivariate GARCH models, in European Journal of Economics, Finance and Administrative Sciences, January 2012
7. Brooks, C. (2002). Introductory econometrics for finance. New York: Cambridge University Press.
8. Celık, S. (2012). The more contagion effect on emerging markets: The evidence of DCC-GARCH model, in Economic Modelling, Elsevier, vol. 29(5), pages 1946-1959.
9. Caporale, G. M., Pittis, N., & Spagnolo, N. (2006). Volatility transmission and financial crises. Journal of Economics and Finance, 30(3), 376-390.
10. Cho, J. H., & Parhizgari, A. M. (2008). East Asian financial contagion under DCCGARCH. International Journal of Banking and Finance, 6(1), 17-30.
11. Christie, A., 1982, “The Stochastic Behavior of Common Stock Variances: Value, leverage, and Interest Rate Effects”, Journal of Financial Economics 10, 407–432.
12. Dedi, L., & Yavas, F.B., (2017). Equity Returns and Volatilities Before and After the 2007-08 Financial Crisis in Zagreb International Review of Economics and Business 20(1):65-79 • May 2017
13. Diebold, F. X., & Yilmaz, K. (2009). Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets in The Economic Journal 119(534):158-171 • January 2009
14. Diebold, F. X., & Yilmaz, K. (2012). Better to Give Than to Receive: Predictive Directional Measurement of Volatility Spillovers in International Journal of Forecasting 28(1) • March 2010
15. E.F. Fama, 1965. The behavior of stock-market prices. The Journal of Business Vol. 38, pp. 34-105
16. Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987-1007.
17. Engle, R. F., Ng, V. K., 1993. Measuring and testing the impact of news on volatility. The Journal of Finance 48, 1749–1778.
18. Engle, R. F., & Sheppard, K. (2001). Theoretical and empirical properties of dynamic conditional correlation multivariate GARCH (No. w8554). National Bureau of Economic Research.
19. Engle, R. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339-350.
20. Fernandez-Izquierdo, A., & Lafuente, J. A. (2004). International transmission of stock exchange volatility: Empirical evidence from the Asian crisis. Global Finance Journal, 15(2), 125-137.
21. Forbes, K., & Rigobon, R. (1999). Measuring contagion: Conceptual and empirical issues, mimeo, MIT.
22. Forbes, K., & Rigobon, R. (2002). No contagion, only interdependence: Measuring stock market co-movement. Journal of Finance, 57, 2223–2261.
23. Hamao, Y, R W Masulis and V Ng (1990): “Correlations in Price Changes and Volatility Across International Stock Markets”. Review of Financial Studies, 3, pp. 281-307.
24. Hwang, I., & In, F., & Kim, T. (2010). Contagion Effects of the US Subprime Crisis on International Stock Markets in Finance and Corporate Governance Conference 2010 Paper.
25. Karunanayake, I., & Valadkhani, A., & O’Brien, M. (2010), Financial crises and international stock market volatility transmission, in Australian Economic Papers 49(3):209-221
26. King, A. M., & Wadhwani, S. (1990). Transmission of Volatility Between Stock Markets, in Review of Financial Studies 3(1):5-33
27. Lee, J. (2006). The comovement between output and prices: Evidence from a dynamic conditional correlation GARCH model. Economics Letters, 91(1), 110-116.
28. Longin, F., & Solnik, B. (1995). Is the correlation in international equity returns constant: 1960-1990? in Journal of International Money and Finance, Vol. 14, No, 1, pp. 3-26.
29. Li, Y., & Giles, D.E. (2013). Modelling Volatility Spillover Effects Between Developed Stock Markets and Asian Emerging Stock Markets in International Journal of Finance & Economics – September 2013.
30. Miyakoshi, T. (2003). Spillovers of stock return volatility to Asian equity markets from Japan and the US. Journal of International Financial Markets, Institutions and Money, 13(4), 383-399.
31. Nelson, D. B., 1991. Conditional heteroskedasticity in asset returns: A new approach.
Econometrica 59, 347–370.
32. Ng, A., (2000) Volatility spillover effects from Japan and the US to the Pacific-Basin. Journal of International Monetary and Finance 19, 207-233.
33. Orskaug, E. (2009). Multivariate DCC-GARCH Model: With Various Error
Distributions (Master’s thesis, Institutt for matematiske fag).
34. Ramchand, L., & Susmel, R. (1998). Volatility and cross correlation across major stock markets, in Journal of Empirical Finance, 1998, vol. 5, issue 4, 397-416
35. Rigobon, R. (2016). Working Paper Series: Contagion, spillover and interdependence. No 1975, representing the views of the European Central Bank (ECB).
36. Savva, C., & Osborn, D., & Gill, L. (2009). Spillovers and correlations between US and major European stock markets: the role of the euro, in Applied Financial Economics, 2009, vol. 19, issue 19, 1595-1604.
37. Sok-Gee, C., Karim, M. A., & Karim, M. A. (2010). Volatility spillovers of the major stock markets in ASEAN-5 with the US and Japanese stock markets. International Research Journal of Finance and Economics, 44, 161-72.
38. Solnik, B., & Boucrelle, C., & Fur, L. Y. (1996). International Market Correlation and Volatility, in Financial Analysts Journal 52(5):17-3.
39. Theodossiou, P., & Lee, U. (1993). Mean and volatility spillovers across major national stock markets: further empirical evidence. Journal of Financial Research, 16(4), 337-350.
40. Tho, T., & Lam, H. (2015). Spillovers between stock market and foreign exchange market in Vietnam, Journal of Development and Intergration, No. 21 (31) MarApr/2015, 34-39.
41. Worthington, A., & Higgs, H. (2004). Transmission of equity returns and volatility in Asian developed and emerging markets: A multivariate GARCH analysis. International Journal of Finance & Economics, 9(1), 71-80.
42. Yilmaz, K. (2009). Return and volatility spillovers among the East Asian equity markets. Journal of Asian Economics 21 (3), 304-313