Return Dynamics and Volatility Spill Over Effects of Stock Markets in G20 Countries

G20, a group of developed countries and major emerging markets, was formed in 1990. G20 aims to bring economic cooperation and the promotion of international financial stability. Economic cooperation of G20 countries has led to the integration of stock markets. The integrated markets may cause volatility of one market getting spillover into other markets. As a result, every market receives spillover and also contributes to the volatility of other markets. Understanding the market interdependencies and estimating the volatility spillover effect is an inherent process in portfolio management. Our study examines the return dynamics and volatility spillover effect among the G20 countries. The interdependencies of G20 stock markets are tested using cointegration test. We apply vector autoregression (VAR) to decompose the variance and created a methodology to calculate the spillover index for stock market volatility. The research is based on the major stock indices of G20 countries for the years between 2002 and 2018. The results indicate the presence of asymmetric volatility spillover effect among the stock markets of G20 countries. We observe a significant increase in volatility spillover from 1 to 5 weeks forecast of error variance. The shocks in the developed market trigger volatility to other emerging markets. The outcome of the study would facilitate the investors and portfolio managers to make an informed decision by considering the nature of stock market volatility.