Volatility Contagion across the Equity Markets of Developed and Emerging Market Economies
Hattori, Masazumi; Shim, Ilhyock; Sugihara, Yoshihiko | July 2016
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.
Citation
Hattori, Masazumi; Shim, Ilhyock; Sugihara, Yoshihiko. 2016. Volatility Contagion across the Equity Markets of Developed and Emerging Market Economies. © Asian Development Bank Institute. http://hdl.handle.net/11540/6627.Keywords
International Financial Market
Multilateral Financial Institutions
Economic Recession
Market
Crisis
Economic indicators
Growth models
Gross domestic product
Macroeconomics
Economic forecast
Financial Stability
Financial Management System
Financial Restructuring
Capital Market Development
Erosion
Market Development
Economics
Erosion
International Economics
Macroeconomic
Macroeconomic Analysis
Performance Evaluation
Impact Evaluation
Business recessions
Multilateral development banks
Regulatory reform
Capital
Exports
Economic development projects
Economic policy
Economic forecasting
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Citable URI
http://hdl.handle.net/11540/6627Metadata
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