Volatility Contagion Across the Equity Markets of Developed and Emerging Market Economies

24 Pages Posted: 13 Sep 2016 Last revised: 8 Feb 2017

See all articles by Masazumi Hattori

Masazumi Hattori

Hitotsubashi University

Ilhyock Shim

Bank for International Settlements (BIS)

Yoshi Sugihara

Bank of Japan

Date Written: August 12, 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.

Keywords: equity market, equity fund flow, cross-equity market, spillover effects, global financial crisis, financial market volatility, variance risk premium, emerging market economies, eurozone, interest rate, nonparametric analysis, ordinary least squares, OLS, univariate, market correlation, regression an

JEL Classification: F32, G12, G15, G23

Suggested Citation

Hattori, Masazumi and Shim, Ilhyock and Sugihara, Yoshi, Volatility Contagion Across the Equity Markets of Developed and Emerging Market Economies (August 12, 2016). ADBI Working Paper 590, Available at SSRN: https://ssrn.com/abstract=2838112 or http://dx.doi.org/10.2139/ssrn.2838112

Masazumi Hattori (Contact Author)

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Ilhyock Shim

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

Yoshi Sugihara

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
103
Abstract Views
938
Rank
467,508
PlumX Metrics