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Time-varying price shock transmission and volatility spillover in foreign exchange, bond, equity, and commodity markets: Evidence from the United States

Shuairu Tian and Shigeyuki Hamori ()

The North American Journal of Economics and Finance, 2016, vol. 38, issue C, 163-171

Abstract: We study the cross-market financial shocks transmission mechanism on the foreign exchange, equity, bond, and commodity markets in the United States using a time-varying structural vector autoregression model with stochastic volatility (TV-SVAR-SV). The price shocks are absorbed immediately in two or three days, suggesting that all markets are quite efficient. A slight mean reversion and an overshooting behavior are observed. Considering the volatility spillover effect, we highlight two properties of volatility shocks. First, the effects of the volatility shocks are released gradually. Reaching peak volatility spillover levels would require five to ten days. Second, the dynamics of volatility spillovers vary tremendously over time. Different types of markets respond to certain, but not all, extreme events. Our findings suggest the need to conduct investor monitoring of current events instead of using technical analysis based on historical data. Investors should also diversify their portfolios using assets that can respond to different and extreme shocks.

Keywords: Price shock transmission; Volatility spillovers; Time-varying structural vector autoregression model; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:ecofin:v:38:y:2016:i:c:p:163-171