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Volatility Contagion across the Equity Markets of Developed and Emerging Market Economies

Author

Listed:
  • Hattori, Masazumi

    (Asian Development Bank Institute)

  • Shim, Ilhyock

    (Asian Development Bank Institute)

  • Sugihara, Yoshihiko

    (Asian Development Bank Institute)

Abstract

Using variance risk premiums (VRPs) nonparametrically calculated from equity markets in selected major developed economies and emerging market economies (EMEs) over 2007‒2015, we document the correlation of VRPs across the markets and examine whether equity fund flows work as a path through which VRPs spill over globally. First, we find that VRPs tend to spike up during market turmoil such as the peak of the global financial crisis and the European debt crisis. Second, we find that all cross-equity market correlations of VRPs are positive, and that some economy pairs exhibit high levels of the correlation. In terms of volatility contagion, we find that an increase in VRPs in the United States significantly reduces equity fund flows to other developed economies, but not those to EMEs, in the period after the global financial crisis. Two-stage least squares estimation results show that equity fund flows are a channel for spillover of VRPs in the United States to VRPs in other developed economies.

Suggested Citation

  • Hattori, Masazumi & Shim, Ilhyock & Sugihara, Yoshihiko, 2016. "Volatility Contagion across the Equity Markets of Developed and Emerging Market Economies," ADBI Working Papers 590, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0590
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    References listed on IDEAS

    as
    1. Raczko, Marek, 2015. "Volatility contagion: new evidence from market pricing of volatility risk," Bank of England working papers 552, Bank of England.
    2. Geert Bekaert & Michael Ehrmann & Marcel Fratzscher & Arnaud Mehl, 2014. "The Global Crisis and Equity Market Contagion," Journal of Finance, American Finance Association, vol. 69(6), pages 2597-2649, December.
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    6. Bollerslev, Tim & Marrone, James & Xu, Lai & Zhou, Hao, 2014. "Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(03), pages 633-661, June.
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    More about this item

    Keywords

    equity market; equity fund flow; cross-equity market; spillover effects; global financial crisis; financial market volatility; variance risk premium; emerging market economies; eurozone; interest rate; nonparametric analysis; ordinary least squares; OLS; univariate; market correlation; regression analysis;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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