Transmission of Risk Between U.S. and Emerging Equity Markets

Ghulam Sarwar

Emerging Markets Finance and Trade, 2019, vol. 55, issue 5, 1171-1183

Abstract: This study examines the transmission of risk between VIX and VIX-like measures of the Chinese, Brazilian, and overall emerging stock markets (EM) in an integrated system that allows multi-directional risk interactions through the first and second moments of volatility processes. Our VARMAX-DCC-QGARCH model reveals significant interactions in the covariance terms of VIX and EM volatility changes which show persistence and facilitate risk transmission. Our results show that VIX and EM volatility changes have predictive ability for each other. Further, VIX shocks contribute 51–71% to the prediction error of EM volatility shocks, but EM volatilities do not contribute to the VIX’s prediction errors. Our results highlight the potential weakness of risk transmission models that ignore interactions through the multivariate variance–covariance matrix and have important implications for volatility trades, portfolio diversification, and hedging the cross-market risks.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:55:y:2019:i:5:p:1171-1183

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DOI: 10.1080/1540496X.2018.1468248

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