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An examination of return and volatility spillovers between mature equity markets

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Abstract

We examine price discovery and volatility spillover among equity markets of eight mature market economies (MMEs) – Australia, Canada, France, Germany, Italy, Japan, U.K. and U.S.A. – from January 2003 to July 2014, covering three sub-periods – prior to the 2007–09 global financial crisis (GFC), during crisis, and post-crisis. The results of price discovery indicate that the equity markets of Italy and the U.K. lead other markets in pre-crisis and crisis periods, respectively. No single market is dominant in post-crisis period. Dynamic cointegration results reconfirm our findings from Johansen’s co-integration test. For the full sample period as well as sub-periods, asymmetric dynamic conditional correlation (ADCC-EGARCH) coefficients are high between Australia and Japan, and among European Union MMEs. U.S. is negatively associated with other MMEs, except Canada with whom it seems to be uncorrelated. In the BEKK-EGARCH analysis, we find no long-term volatility spillovers for France and Germany with Italy, U.K. and U.S., in the post-crisis period. Our findings confirm reduced economic influence of the U.S. on other mature markets, as a result of the crisis. Further, regional patterns are observed in information linkages for the sample markets. The findings of the study have implications for policy makers and investors.

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Notes

  1. International Monetary Fund, “World Economic Outlook: Seeking Sustainable Growth – Short-Term Recovery, Long-Term Challenges”, 2017, (https://www.imf.org/en/Publications/WEO/Issues/2017/09/19/world-economic-outlook-october-2017).

  2. Financial contagion literature suggests correlations among stock markets increase during a crisis. Forbes and Rigobon (2002) state that contagion relates to cross-market linkages being fundamentally different after a shock to one market.

  3. The Guardian, (http://www.theguardian.com/business/2012/aug/07/credit-crunch-boom-bust-timeline) and the BBC (http://news.bbc.co.uk/2/hi/business/7521250.stm) timelines substantiate this.

  4. The results of stationarity testing are available upon request.

  5. Greece, Ireland, Italy, Portugal and Spain were identified as the five economies in the EU which had high public debt and became weaker following the GFC.

  6. The United Kingdom voted to exit the European Union in a referendum held on June 23, 2016, popularly referred to as ‘Brexit’.

  7. “Global Perspectives on Capital Market Integration”, Speech by José Viñals, Director, Monetary and Capital Markets Department, IMF, 2015 (https://www.imf.org/external/np/speeches/2015/070215.htm).

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Authors and Affiliations

  1. Department of Financial Studies, University of Delhi, South Campus, Benito Juarez Road, New Delhi, 110021, India

    Payal Jain & Sanjay Sehgal

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  1. Payal Jain
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  2. Sanjay Sehgal
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Correspondence to Payal Jain.

Appendix

Appendix

Table 8 Sample stock markets and their indices
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Fig. 2
figure 2figure 2

Dynamic cointegration among sample markets (continued from main text)

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Table 9 BEKK-EGARCH results (continued from main text)
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Jain, P., Sehgal, S. An examination of return and volatility spillovers between mature equity markets. J Econ Finan 43, 180–210 (2019). https://doi.org/10.1007/s12197-018-9442-1

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