Price and Volatility Spillovers Across North American, European and Asian Stock Markets: With Special Focus on Indian Stock Market

Abstract

This paper investigates interdependence of fifteen world indices including an Indian market index in terms of return and volatility spillover effect. Interdependence of Indian stock market with other fourteen world markets in terms of long run integration, short run dependence (return spillover) and volatility spillover are investigated. These markets are that of are and United States. Long run and short run integration is examined through Johansen cointegration techniques and Granger causality test respectively. Vector autoregressive model (VAR 15) is used to estimate the conditional return spillover among these indices in which all fifteen indices are considered together. The effect of same day return in explaining the return spillover is also modeled using univariate models. Volatility spillover is estimated through AR-GARCH in which residuals from the index return is used as explanatory variable in GARCH equation. Return and volatility spillover between Indian and other markets are modeled through bivariate VAR and multivariate GARCH (BEKK) model respectively. It is found that there is greater regional influence among Asian markets in return and volatility than with European and US. Japanese market, which is first to open, is affected by US and European markets only and affects most of the Asian Markets. Also, high degree of correlation among European indices namely FTSE, CAC and DAX is observed. US market is influenced by both Asian and European markets. Specific to Indian context, it is found that Indian market is not cointegrated with rest of the world except Indonesia. This may provide diversification benefits for potential investors. However, strong short run interdependence is found between Indian markets and most of the other markets. Indian and other markets like US, Japan, Korea, and Canada positively affect each others' conditional returns significantly. Indian market also has significant effect on Malaysia, Pakistan, and Singapore return. This study found that there is significant positive volatility spillover from other markets to Indian market, mainly from Hong Kong, Korea, Japan, and Singapore and US market. Indian market affects negatively the volatility of US and Pakistan. It is interesting to note that Chinese and Pakistan markets are less integrated with other Asian, European and US markets.

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“…This finding is consistent with virtually all the studies that evaluated this aspect of the emerging markets, especially the studies of Shin (2005), Singh et al (2008) and Park (2010). The group of BRIC markets have also shown similar behaviours compared to those of the group of industrialised markets regarding presence of persistent effects of shocks on volatility, presence of volatility asymmetry, and slower reaction of volatility to market variations.…”

Sector Volatility Spillover and Economic Policy Uncertainty: Evidence from China’s Stock Market

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Stock Market Volatility – Conceptual Perspective through Literature Survey

“…Suchismita Bose (2007) use daily data of S&P CNX Nifty index from June 2000 to March 2007 and found significant asymmetry response during the period of market retreats and advance, with increasing volatility during the times of market decline (2000)(2001)(2002) being sharper and more persistent. Similarly, Singh et al (2008) examined the price and volatility spillover between India and other markets and observed volatility spillover effect from Hong Kong, Japan, Korea, Singapore and US to the Indian market.…”