Does high volatility increase connectedness? A study of Asian equity markets

Thomas Wiesen, Oluwasegun Babatunde Adekoya, Johnson Oliyide and Richard Afatsao

International Review of Financial Analysis, 2024, vol. 96, issue PB

Abstract: Financial market integration metrics based upon variance decompositions from vector autoregression (VAR) models have become quite popular, and prior literature shows how these metrics change over time. However, only a few studies explain what is driving connectedness to change. Using stock market volatilities from eight Asian equity markets, we postulate that volatility may be a driving force behind increased connectedness. We use a two-step VAR estimation procedure to analyze the dynamics between equity market volatility and connectedness. The first step estimates the VAR model over rolling windows; this yields a sequence of connectedness-measuring spillover indices. The second step re-estimates the VAR with the spillover index sequence as an endogenous variable. Impulse response analysis from the two-step procedure confirms that volatility shocks increase connectedness. The two-step procedure indicates that volatility shocks from Singapore, Hong Kong, and China affect connectedness the most, whereas Malaysia affects it the least. China’s direct effect on the volatilities of the other markets is small. However, since China has a considerable impact on connectedness, China may have an important indirect effect on the other markets by increasing the speed and ease with which volatility spreads from market to market.

Keywords: Asia; Connectedness; Contagion; Market integration; Spillovers; Stock market; Variance decomposition; Volatility (search for similar items in EconPapers)
JEL-codes: C32 F36 F37 G15 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521924006677
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006677

DOI: 10.1016/j.irfa.2024.103735

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().