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Domestic and foreign sources of volatility spillover to South African asset classes

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  • Duncan, Andrew S.
  • Kabundi, Alain

Abstract

The paper characterises domestic and foreign sources of volatility transmission for South African (SA) bonds, commodities, currencies, and equities. We introduce a small-open-economy extension of the volatility spillover model proposed by Diebold and Yilmaz (2012). Based on generalised variance decompositions (Pesaran and Shin, 1998) of a vector autoregressive model, this approach combines bidirectional spillovers exchanged by domestic assets with volatility injections imported from shocks to the global financial system. The analysis relates to a sample of daily observations ranging from October 1996 to June 2010. The estimated spillover levels are time-varying, and increase during domestic and foreign crises. Average domestic spillovers of 38% exceed average foreign spillovers of 4.7%, and maximum domestic spillovers estimated for the United States for a similar sample period (Diebold and Yilmaz, 2012). These findings suggest a high degree of systemic risk in SA and, furthermore, that this risk is predominantly related to country-specific factors. Commodity and equity shocks are identified as the primary sources of spillovers to other asset classes.

Suggested Citation

  • Duncan, Andrew S. & Kabundi, Alain, 2013. "Domestic and foreign sources of volatility spillover to South African asset classes," Economic Modelling, Elsevier, vol. 31(C), pages 566-573.
  • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:566-573
    DOI: 10.1016/j.econmod.2012.11.016
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. el Alaoui, AbdelKader O. & Ismath Bacha, Obiyathulla & Masih, Mansur & Asutay, Mehmet, 2017. "Leverage versus volatility: Evidence from the capital structure of European firms," Economic Modelling, Elsevier, vol. 62(C), pages 145-160.
    2. Fernando Fernández-Rodríguez & Marta Gómez-Puig & Simón Sosvilla-Rivero, 2015. "“Financial stress transmission in EMU sovereign bond market volatility: a connectedness analysis”," IREA Working Papers 201508, University of Barcelona, Research Institute of Applied Economics, revised Jan 2015.
    3. repec:ucm:wpaper:04-15 is not listed on IDEAS
    4. Afees A. Salisu & Kazeem Isah, 2017. "Modeling the spillovers between stock market and money market in Nigeria," Working Papers 023, Centre for Econometric and Allied Research, University of Ibadan.
    5. Sugimoto, Kimiko & Matsuki, Takashi & Yoshida, Yushi, 2014. "The global financial crisis: An analysis of the spillover effects on African stock markets," Emerging Markets Review, Elsevier, vol. 21(C), pages 201-233.
    6. repec:eee:jimfin:v:77:y:2017:i:c:p:39-56 is not listed on IDEAS
    7. Andrew S. Duncan & Alain Kabundi, 2014. "Global Financial Crises and Time-Varying Volatility Comovement in World Equity Markets," South African Journal of Economics, Economic Society of South Africa, vol. 82(4), pages 531-550, December.
    8. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "Volatility spillovers in EMU sovereign bond markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 337-352.
    9. Mina Dragouni & George Filis & Nikolaos Antonakakis, 2013. "Time-Varying Interdependencies of Tourism and Economic Growth: Evidence from European Countries," FIW Working Paper series 128, FIW.
    10. Zhu, Xiaoqian & Xie, Yongjia & Li, Jianping & Wu, Dengsheng, 2015. "Change point detection for subprime crisis in American banking: From the perspective of risk dependence," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 18-28.
    11. Baruník, Jozef & Kočenda, Evžen & Vácha, Lukáš, 2017. "Asymmetric volatility connectedness on the forex market," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 39-56.
    12. Majdoub, Jihed & Mansour, Walid, 2014. "Islamic equity market integration and volatility spillover between emerging and US stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 452-470.
    13. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Using connectedness analysis to assess financial stress transmission in EMU sovereign bond market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 126-145.
    14. el Alaoui, AbdelKader Ouatik & Bacha, Obiyathulla Ismath & Masih, Mansur & Asutay, Mehmet, 2016. "Shari’ah screening, market risk and contagion: A multi-country analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 93-112.
    15. repec:eee:ecmode:v:69:y:2018:i:c:p:237-248 is not listed on IDEAS

    More about this item

    Keywords

    Asset market linkages; Financial crises; Generalised variance decompositions; Small open economies; Volatility spillovers;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G1 - Financial Economics - - General Financial Markets
    • F3 - International Economics - - International Finance

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