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

Masazumi Hattori, Ilhyock Shim and Yoshihiko Sugihara
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Masazumi Hattori: Asian Development Bank Institute
Yoshihiko Sugihara: Asian Development Bank Institute

No 590, ADBI Working Papers from Asian Development Bank Institute

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 analysis (search for similar items in EconPapers)
JEL-codes: F32 G12 G15 G23 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-09-23
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (2)

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