Emerging stock market volatility and economic fundamentals: the importance of US uncertainty spillovers, financial and health crises

Abstract

This paper studies the US and global economic fundamentals that exacerbate emerging stock markets volatility and can be considered as systemic risk factors increasing financial stability vulnerabilities. We apply the bivariate HEAVY system of daily and intra-daily volatility equations enriched with powers, leverage, and macro-effects that improve its forecasting accuracy significantly. Our macro-augmented asymmetric power HEAVY model estimates the inflammatory effect of US uncertainty and infectious disease news impact on equities alongside global credit and commodity factors on emerging stock index realized volatility. Our study further demonstrates the power of the economic uncertainty channel, showing that higher US policy uncertainty levels increase the leverage effects and the impact from the common macro-financial proxies on emerging markets’ financial volatility. Lastly, we provide evidence on the crucial role of both financial and health crisis events (the 2008 global financial turmoil and the recent Covid-19 pandemic) in raising markets’ turbulence and amplifying the volatility macro-drivers impact, as well.

Macro‐financial linkages in the high‐frequency domain: Economic fundamentals and the Covid‐induced uncertainty channel in US and UK financial markets

“…Following the econometric representation of Karanasos and Yfanti (2020) and Karanasos et al (2022), the HEAVY system of equations involves two variables: the close-to-close returns (r t ) and the realized measure based on high-frequency observations RM t . First, we calculate the signed square rooted (SSR) realized measure:…”

“…Our study contributes to the existing macro-finance literature in two important areas: (i) in volatility modelling, by implementing a novel macro-augmented econometric approach and demonstrating its superiority over standard benchmark models, and (ii) in the investigation of macro-financial linkages with the effects of domestic uncertainty levels on the stability of US and UK financial markets, using high-frequency data and the Covidinduced impact. Hence, we demarcate our study from Karanasos and Yfanti (2020), who focus on European markets with the UK uncertainty level effects without the pandemic impact, and from Karanasos et al (2022), who study the influence of the second moment (volatility) of the US uncertainty on emerging markets. The bivariate model of the two volatility series is suitable for equity market returns and several other financial assets, such as bonds, commodities or cryptocurrencies and business finance applications, such as investing and trading in bond and commodity markets, foreign exchange risk hedging and further important daily business operations of corporate treasuries.…”

“…We find that realized volatility is significantly affected by the macro variables and their inclusion improves the model's forecasting performance. In contrast with Karanasos and Yfanti (2020) and Karanasos et al (2022), who explore the UK-and US-led uncertainty spillovers over the European and emerging markets, respectively, our motivation here is to investigate the crucial role of the local uncertainty effect (US and UK uncertainties on US and UK stock markets, respectively) and emphasize the need for daily newsbased uncertainty indices covering more countries than only the UK and the US.…”

A Nonlinear Approach to Quantifying Investor Fear in Stock Markets of BRIC

“…In reposeful and tumultuous epochs, the influence of the economic circumstances of the US, particularly volatilities in the US equities indices, on the equities markets of significant frontier economies, like BRIC, has been widely documented (see [21][22][23]; and the references therein). Consequently, international shocks, especially those emanating from the US equities market, could be transmitted to the BRIC equities markets but in diverse forms based on market conditions.…”

Forecasting Value at Risk and Expected Shortfall of Foreign Exchange Rate Volatility of Major African Currencies via GARCH and Dynamic Conditional Correlation Analysis

“…Remarkably, research on the exchange rate volatility and dynamic conditional correlation analysis of financial market interdependence has focused on the financial markets in developed countries. Little attention has been paid to the exchange rate volatility of emerging economies, especially African countries, for example, see Karanasos et al ( 2022 ), Niyitegeka and Tewari ( 2020 ), Carsamer ( 2015 ), Jordaan ( 2015 ), Raputsoane ( 2008 ), Yonis ( 2011 ), Emenike ( 2018 ) and Mohammed et al ( 2021 ). Even the few papers appear to be limited in their scope.…”