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Extreme downside risk spillover from the United States and Japan to Asia-Pacific stock markets


  • Liu, Lu


This paper proposes a binary response model approach to measure and forecast extreme downside risks in Asia-Pacific markets given information on extreme downside risks in the U.S. and Japanese markets. The extreme downside risk of a market is measured as the occurrence of extreme downside movement—market returns falling below left-tail Value at Risk in a Markov switching framework. The empirical findings are consistent with the following notions. First, extreme downside movements of the S&P 500 and Nikkei 225 are significantly predictive for the likelihood of extreme downside movements in all the investigated Asia-Pacific markets. Second, the majority of Asia-Pacific markets become more sensitive to Japan's extreme downside risk when the Japanese market switches into high volatility periods, whereas the U.S. spillover effect is intensified only on Taiwan during high volatility periods in the U.S. Third, mainland China is the least sensitive to extreme downside risk in the U.S. and Japan, Australia is the most sensitive to the U.S., and Singapore is the most sensitive to Japan.

Suggested Citation

  • Liu, Lu, 2014. "Extreme downside risk spillover from the United States and Japan to Asia-Pacific stock markets," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 39-48.
  • Handle: RePEc:eee:finana:v:33:y:2014:i:c:p:39-48
    DOI: 10.1016/j.irfa.2013.07.009

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    References listed on IDEAS

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    Cited by:

    1. Mehmet Balcilar & Rangan Gupta & Duc K. Nguyen & Mark E. Wohar, 2015. "Causal Effects of the United States and Japan on Pacific-Rim Stock Markets: Nonparametric Quantile Causality Approach," Working Papers 201595, University of Pretoria, Department of Economics.
    2. repec:kap:compec:v:50:y:2017:i:2:d:10.1007_s10614-016-9587-y is not listed on IDEAS
    3. Výrost, Tomáš & Lyócsa, Štefan & Baumöhl, Eduard, 2015. "Granger causality stock market networks: Temporal proximity and preferential attachment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 427(C), pages 262-276.
    4. Kundu, Srikanta & Sarkar, Nityananda, 2016. "Return and volatility interdependences in up and down markets across developed and emerging countries," Research in International Business and Finance, Elsevier, vol. 36(C), pages 297-311.
    5. repec:eee:mulfin:v:41:y:2017:i:c:p:80-91 is not listed on IDEAS

    More about this item


    Extreme downside risk; Risk spillover; Value at Risk; Granger causality in risk; Markov switching; Extreme value regression;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation


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