Return and Volatility Transmission in Emerging and Developed Stock Markets

Yarovaya, Larisa (2016) Return and Volatility Transmission in Emerging and Developed Stock Markets. Doctoral thesis, Northumbria University.

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Abstract

This dissertation provides empirical evidence on the patterns of intra- and inter-regional transmission of information across 10 developed and 11 emerging markets in Asia, the Americas, Europe and Africa using both stock indices and stock index futures. First, the main channels of contagion are examined in the period from 2005 to 2014 through the analysis of return and volatility spillovers around the most recent crises based on the generalized vector autoregressive framework. The findings demonstrate that markets are more susceptible to domestic and region-specific volatility shocks than to inter-regional contagion. Second, the inter-regional spillovers across markets with non-overlapping trading hours are investigated using asymmetric causality test. The results demonstrate that the signal receiving markets are sensitive to both negative and positive volatility shocks, which reveals the asymmetric nature of volatility transmission channels. Third, this study explores the ability of foreign information to forecast returns on domestic market. The results have implications for international portfolio diversification. The spillovers between emerging and developed markets are weaker than between developed markets, consequently the benefits of international portfolio diversification are best achievable by investing in emerging markets in different geographical zones. The burst in spillovers during crisis episodes is verified, which is important for investors as during periods of turmoil diversification benefits are limited. A novel results reported in the study is a difference in patterns of international transmission between models employing indices and futures data. The study shows that futures data provide more efficient channels of information transmission, because the magnitude of return and volatility spillovers across futures is larger than across indices. The results presented in this dissertation suggest that the analysis of spillovers across stock index futures has important practical implications for the development of trading strategies. The findings are relevant to practitioners and policy makers to enhance their understanding of financial markets interconnectedness.

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