GARCH - BEKK Approach to Volatility Behavior and Spillover : Evidence from India, China, Hong Kong, and Japan
DOI:
https://doi.org/10.17010/ijf/2018/v12i4/122791Keywords:
Volatility
, Volatility Spillovers, GARCH-BEKK Models, ARCH Effect, GARCH EffectC58
, C49, F65, F63Paper Submission Date
, September 5, 2017, Paper sent back for Revision, March 3, 2018, Paper Acceptance Date, March 22, 2018.Abstract
The present study investigated the volatility behavior and its spillover in stock markets of four Asian countries namely : India, China, Hong Kong, and Japan. ARCH, GARCH (1, 1), and bivariate GARCH - BEKK model was applied to examine and explore the volatility behavior and its spillover from one country to another. The results of the study indicated that the Chinese market suffered the greatest fluctuation and the Indian financial market was the most stable market amongst the chosen markets. A strong regional economic integration and analogous growth pattern was observed between Hong Kong and India. The results further hinted that previous volatility had more impact on the current volatility in comparison to the shocks or news coming to the markets as GARCH coefficient was found to be much larger than ARCH coefficient for each of the markets. The stock market of China was less sensitive to its past shocks ; whereas, the stock market of Japan was the most sensitive to its own past shocks. The GARCH coefficient was highest for China. Therefore, it may be concluded that volatility was more persistent in Chinese markets. According to GARCH - BEKK, information was shared swiftly between stock markets of all the countries, however, with a varied degree. The cross market ARCH effect was strongest between China and Japan followed by Hong Kong and Japan, and it was weakest for China and India. Persistency of cross market volatility was highest for the pair of China and India followed by Hong Kong and India, and lowest for China and Japan.Downloads
Downloads
Published
How to Cite
Issue
Section
References
Adjasi, C. K. (2009). Macroeconomic uncertainty and conditional stock-price volatility in frontier African markets: Evidence from Ghana. The Journal of Risk Finance, 10 (4), 333 - 349.
Agarwal, S. (2017). Volatility in stock markets: A comparison of developed and emerging markets of the world. Indian Journal of Commerce and Management Studies, 8 (2), 87 - 92.
Ahmad, A., & Rana, U. S. (2012). Forecasting performance of various volatility models on intra-day equity price in the Indian stock market. Indian Journal of Finance, 6(6), 21-29.
Bae, K. H., Karolyi, G. A., & Stulz, R. M. (2003). A new approach to measuring financial contagion. The Review of Financial Studies, 16 (3), 717 - 763.
Baele, L. (2005). Volatility spillover effects in European equity markets. Journal of Financial and Quantitative Analysis, 40 (2), 373 - 401.
Baumöhl, E., & Lyócsa, Š. (2014). Volatility and dynamic conditional correlations of worldwide emerging and frontier markets. Economic Modelling, 38 (C), 175-183.
Bauwens, L., Laurent, S., & Rombouts, J. V. (2006). Multivariate GARCH models: A survey. Journal of Applied Econometrics, 21(1), 79-109.
Beirne, J., Caporale, G. M., Schulze - Ghattas, M., & Spagnolo, N. (2009). Volatility spillovers and contagion from mature to emerging stock markets (Working Paper Series 1113). European Central Bank. Retrieved from https://ideas.repec.org/p/ecb/ecbwps/20091113.html
Bekiros, S. D. (2014). Contagion, decoupling and the spillover effects of the US financial crisis: Evidence from the BRIC markets. International Review of Financial Analysis, 33, 58 - 69.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307-327.
Bordo, M. D., & Murshid, A. P. (2006). Globalization and changing patterns in the international transmission of shocks in financial markets. Journal of International Money and Finance, 25 (4), 655 - 674.
Campbell, J. Y., & Hamao, Y. (1992). Predictable stock returns in the United States and Japan : A study of long - term capital market integration. The Journal of Finance, 47(1), 43 - 69.
Donadelli, M. (2015). Asian stock markets, US economic policy uncertainty and US macro-shocks. New Zealand Economic Papers, 49 (2), 103-133.
Drew, M. E., Naughton, T., & Veeraraghavan, M. (2003). Firm size, book-to-market equity and security returns: Evidence from the Shanghai Stock Exchange. Australian Journal of Management, 28 (2), 119 - 139.
Dungey, M., & Martin, V. L. (2007). Unravelling financial market linkages during crises. Journal of Applied Econometrics, 22 (1), 89 - 119.
Errunza, V., & Losq, E. (1985). International asset pricing under mild segmentation: Theory and test. The Journal of Finance, 40 (1), 105 -124.
Faff, R. W., & McKenzie, M. D. (2007). The relationship between implied volatility and autocorrelation. International Journal of Managerial Finance, 3 (2), 191-196.
Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. The Journal of Finance, 48 (5), 1779 - 1801.
Hafner, C. M., & Reznikova, O. (2012). On the estimation of dynamic conditional correlation models. Computational Statistics & Data Analysis, 56 (11), 3533 - 3545.
Hamao, Y., Masulis, R. W., & Ng, V. (1990). Correlations in price changes and volatility across international stock markets. Review of Financial Studies, 3 (2), 281-307.
Johansson, A. C., & Ljungwall, C. (2009). Spillover effects among the Greater China stock markets. World Development, 37(4), 839-851.
Jorion, P., & Schwartz, E. (1986). Integration vs. segmentation in the Canadian stock market. The Journal of Finance, 41(3), 603 - 614.
Joshi, P. (2011). Return and volatility spillovers among Asian stock markets. SAGE Open, 1(1), 1-8.
Kenourgios, D. (2014). On financial contagion and implied market volatility. International Review of Financial Analysis, 34, 21 - 30.
Khuong Nguyen, D., & Bellalah, M. (2008). Stock market liberalization, structural breaks and dynamic changes in emerging market volatility. Review of Accounting and Finance, 7 (4), 396 - 411.
Koutmos, G. (2012). Modeling interest rate volatility: An extended EGARCH approach. Managerial Finance, 38 (6), 628 - 635.
Kumar, A. S., & Kamaiah, B. (2017). Returns and volatility spillover between Asian equity markets: A wavelet approach. Economic Annals, 62 (212), 63 - 83.
Kumar, S. S. S. (2012). A first look at the properties of India's volatility index. International Journal of Emerging Markets, 7(2), 160-176.
Li, Y., & Giles, D. E. (2015). Modelling volatility spillover effects between developed stock markets and Asian emerging stock markets. International Journal of Finance & Economics, 20 (2), 155-177.
Liu, C. (2016). Spillover effects in major equity markets: A GARCH BEKK approach. Open Access Library Journal, 3 (2), 1-21.
Liu, Y. A., & Pan, M. S. (1997). Mean and volatility spillover effects in the US and Pacific - Basin stock markets. Multinational Finance Journal, 1(1), 47-62.
Mensi, W., Beljid, M., Boubaker, A., & Managi, S. (2013). Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold. Economic Modelling, 32, 15 - 22.
Mishra, A. K. (2004). Stock market and foreign exchange market in India : Are they related? South Asia Economic Journal, 5 (2), 209 - 232.
Nakatani, T., & Teräsvirta, T. (2009). Testing for volatility interactions in the constant conditional correlation GARCH model. The Econometrics Journal, 12 (1), 147-163.
Narayan, S., Sriananthakumar, S., & Islam, S. Z. (2014). Stock market integration of emerging Asian economies: Patterns and causes. Economic Modelling, 39, 19-31.
Narula, I. (2016). Dynamics of volatility behaviour and transmission: Evidences from BRICS countries. Decision, 43 (1), 31-51.
Ng, A. (2000). Volatility spillover effects from Japan and the US to the Pacific - Basin. Journal of International Money and Finance, 19(2), 207-233.
Patel, R. J. (2017). Co-movement and integration among stock markets: A study of 14 countries. Indian Journal of Finance, 11(9), 53 - 66. doi:10.17010/ijf/2017/v11i9/118089
Rajan, M. P. (2011). Volatility estimation in the Indian stock market using heteroscedastic models. Indian Journal of Finance, 5 (6), 26 - 32.
Rao, A. (2008). Analysis of volatility persistence in Middle East emerging equity markets. Studies in Economics and Finance, 25(2), 93 - 111.
Rittler, D. (2012). Price discovery and volatility spillovers in the European Union emissions trading scheme: A high-frequency analysis. Journal of Banking & Finance, 36 (3), 774 - 785.
Shamiri, A., & Isa, Z. (2010). Volatility transmission: What do Asia-Pacific markets expect? Studies in Economics and Finance, 27(4), 299 - 313.
Singh, A., & Kaur, P. (2015). Modelling dynamic volatility spillovers from the U.S. to the BRIC countries' stock markets during the subprime crisis. Indian Journal of Finance, 9(8), 45-55. doi:10.17010/ijf/2015/v9i8/74562
Tuan, T. K., Hwa, Y. S., Chua, S. Y., & Lean, H. H. (2015). Do Indian economic activities impact ASEAN-5 stock markets? Jurnal Ekonomi Malaysia, 49(2), 61 - 76.
Wang, P., & Wang, P. (2010). Price and volatility spillovers between the greater China markets and the developed markets of US and Japan. Global Finance Journal, 21(3), 304 - 317.
Wei, K. J., Liu, Y. J., Yang, C. C., & Chaung, G. S. (1995). Volatility and price change spillover effects across the developed and emerging markets. Pacific-Basin Finance Journal, 3 (1), 113 - 136.
Zhou, X., Zhang, W., & Zhang, J. (2012). Volatility spillovers between the Chinese and world equity markets. Pacific-Basin Finance Journal, 20 (2), 247 - 270.
