Cross-stock market spillovers through variance risk premiums and equity flows

Masazumi Hattori, Ilhyock Shim and Yoshihiko Sugihara

No 702, BIS Working Papers from Bank for International Settlements

Abstract: We estimate variance risk premiums (VRPs) in the stock markets of major advanced economies (AEs) and emerging market economies (EMEs) over 2007-15 and decompose the VRP into variance-diffusive risk premium (DRP) and variance-jump risk premium (JRP). Daily VAR analysis reveals significant spillovers from the VRPs of the United States and eurozone's AEs to the VRPs of other economic areas, especially during the post-Global Financial Crisis (GFC) period. We also find that during the post-GFC period, shocks to the DRPs of the United States and the eurozone's AEs have relatively strong and long-lived positive effects on the VRPs of other economic areas whereas shocks to their JRPs have relatively weak and short-lived positive effects. In addition, we show that increases in the size of US VRP, DRP and JRP tend to significantly reduce weekly equity fund flows to all other AEs and some EMEs during the post-GFC period. Finally, US DRP plays a more important role than US JRP in the determination of equity fund flows to all other AEs and some EMEs after the GFC, while the opposite holds true for equity fund flows to all other AEs during the GFC. Such results indicate the possibility of equity fund flows working as a channel of cross-market VRP spillovers.

Keywords: cross-stock market correlation; emerging market economy; equity fund flow; variance risk premium (search for similar items in EconPapers)
JEL-codes: F32 G12 G15 G23 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2018-02
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Cross-stock market spillovers through variance risk premiums and equity flows (2021)
Working Paper: Cross-stock market spillovers through variance risk premiums and equity flows (2018)
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