Correlation and spillover effects between the US and international banking sectors: New evidence and implications for risk management

Chikashi Tsuji

International Review of Financial Analysis, 2020, vol. 70, issue C

Abstract: This paper quantitatively examines return transmission and volatility spillovers between banking sector stocks in the US and eight other countries by applying our newly extended VAR-DCC-MEGARCH-M model with asymmetric spillovers and Student-t or skew-t errors. Our investigations clarify almost unidirectional stock return transmission from the US banking sector to all other eight international banking sectors. In addition, we also uncover bidirectional volatility spillovers between the US and other eight international banking sector stocks, which are all tied to the leverage effect. Moreover, using the dynamic conditional variances and covariances from our extended model, we derive the time-varying optimal hedge ratios and optimal portfolio weights. These analyses reveal that, except for such extraordinary periods as during financial crises, we can hedge the US banking sector stocks with other international banking sector stocks, and that well-balanced portfolios of the US and other banking sector stocks are optimal. Furthermore, additional analysis using gold, silver, and platinum futures reveals that we can hedge international banking sector stocks with precious metal futures highly effectively, and that well-balanced portfolios of banking stocks and precious metals are optimal. Based on the results from our analyses, this paper derives many significant interpretations and implications for financial and systemic risk management.

Keywords: DCC-MGARCH model; Financial risk management; International banking sector; Return transmission; Systemic risk; Volatility spillover (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G15 G21 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:70:y:2020:i:c:s1057521919302224

DOI: 10.1016/j.irfa.2019.101392

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