Return and volatility spillover between India and leading Asian and global equity markets: an empirical analysis

Abstract

PurposeThe study uses the multivariate GARCH-BEKK model (which was first proposed by Baba et al. (1990) and then further developed by Engle and Kroner (1995)) to examine the return and volatility spillover between India and four leading Asian (namely, China, Japan, Singapore and Hong Kong) and two global (namely, the United Kingdom and the United States) equity markets.Design/methodology/approachThe study employs a multivariate GARCH-BEKK model to quantify return correlation and volatility transmission across the pre- and post-2008 global financial crisis periods (apart from other conventional time series modelling like cointegration, Granger causality using vector error correction model (VECM)).FindingsThe results show a tendency of the Indian stock market index to move along with the US and Hong Kong market indices. The decrease in the value of the co-integration coefficient during the recession was explained by reduced investor confidence in developing countries. The result further shows a clear distinction in terms of volatility spillover between the Asian market vis-a-vis US and UK markets. Volatility transmission from India to Asian markets was found to be significantly higher as compared to the US and UK. So also, the study’s results show a puzzling result giving us comparable co-integration ranks for phase 2 (expansion) and phase 3 (slow-down) of the business cycle in most cases.Research limitations/implicationsIn Granger causality testing, the results were unable to ascertain the difference between phase 2 (expansion) and phase 3 (slowdown). However, the multivariate GARCH (MGARCH)-BEKK model showed a clear reduction in volatility transmission to NIFTY50 (is the flagship index on the National Stock Exchange of India Ltd. (NSE)) as India entered slow-down. This shows that the Indian economy does go through different business cycles, and the changes in parameters hence prove hypothesis 3 to be true with respect to volatility transmission to India from International markets.Originality/valueThe results show that for all countries, the volatility transmitted to India increases significantly going from phase 1 (recession) to phase 2 (expansion) and reduces again once the countries enter slow-down in phase 3 (slowdown). This shows that during expansion shocks and impulses in international markets affect the Indian markets significantly, supporting the increase in co-integration in phase 2 (expansion). During expansion, developing markets like India become profitable for investors, due to the high growth rate when compared to developed countries. This implies that a significant amount of capital enters Indian markets, which is susceptible to the volatility of international markets. The volatility transmission from India to the US and UK was insignificant in phase 1 (recession and recovery) and phase 3 (slow-down) showing a weak linkage between the markets during volatile time periods.

Economic integration and stock market linkages: evidence from South Africa and BRIC

“…The benefit of using the BEKK–MGARCH system to compute dynamic correlations is to capture the potential spillovers in the BRICS-wide stock markets, which is valuable in measuring the extent of linkage. Mishra et al . (2022) employ the same model in a related application.…”

Stock price forecasting based on the relationship among Asian stock markets using deep learning

“…According to Chiang and Doong, 3 the relationship among Asian stock markets is dynamic and influenced by several factors, including macroeconomic conditions, political events, and investor sentiment. Research studies show that the emerging stock markets exhibit a high degree of interrelationships with markets in the region being highly correlated 4,5 . Chan et al 6 discovered that the stock markets of Korea, Taiwan, Hong Kong, and Singapore are highly interdependent, with significant spillover effects.…”

Asymmetric volatility spillover between hospitality sub-sectors during COVID-19: evidence from the USA

“…Over the years, financial markets and economic sectors have been growing more integrated courtesy of advancement in information technologies, financial liberalization and globalization (Panda and Nanda, 2018). The increased integration has aroused the need for investors and policy makers to comprehend the magnitude of information transmission between financial markets or sectors (Mishra et al , 2022). This knowledge is important especially during turbulent periods such as the global financial crisis (GFC) and Eurozone debt crisis (EZDC) (Choi et al , 2021).…”

“…Additionally, we analyze the magnitudes and directions of volatility spillover between hospitality sub-sectors. The examination of volatility spillover among sectors has tremendous implications for risk management, asset valuation and allocation and portfolio diversification (Mishra et al , 2022). Literature on volatility spillovers between financial markets has gained significant scholarly attention.…”