Stock market integration and volatility spillovers: new evidence from Asia–Pacific and European markets

Biplab Kumar Guru and Inder Sekhar Yadav

Journal of Risk Finance, 2023, vol. 24, issue 2, 186-211

Abstract: Purpose - This work investigates the volatility spillovers across stock markets and the nature of such spillovers through different periods of crises and tranquility. Design/methodology/approach - Using daily stock return volatility data from June 2003 to June 2021, the generalized forecast error variance decomposition method (based on Diebold and Yilmaz, 2012 approach) is employed to measure the degree of volatility spillovers/connectedness among stock markets of 24 Asia–Pacific and 12 European Union (EU) economies. Findings - The empirical results from static analysis suggested that about 28.1% (63.7%) of forecast error variance in return volatility for Asia–Pacific (EU) markets is due to spillovers. The evidence from dynamic analysis suggested that during mid of the global financial crisis, European debt crisis (EDC) and Covid-19, the gross volatility spillovers for Asia–Pacific (EU) was around 67% (80%), 65% (80%) and 73% (67%), respectively. The degree of net volatility transmission from Singapore (Denmark) to other Asia–Pacific (EU) markets was found to be highest. Practical implications - The findings have crucial implications for the investors and portfolio managers in assessment of risk and optimum allocation of assets and investment decisions. Originality/value - This study adds to the literature on risk management by systematically examining the impact of global financial crises, EDC and Covid-19 on the market interactions by capturing the magnitude, duration and pattern of the shock-specific market volatilities for a large sample of Asian and European markets using recent and large data set.

Keywords: Stock market integration; Volatility spillovers; Diebold–Yilmaz; Forecast error variance decomposition; Asia and European markets; G01; G11; G14; G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-03-2022-0065

DOI: 10.1108/JRF-03-2022-0065

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