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Structural Breaks in Volatility Transmission from Developed Markets to Major Asian Emerging Markets

Dilip Kumar

Journal of Emerging Market Finance, 2019, vol. 18, issue 2, 172-209

Abstract: The study investigates the volatility transmission from developed markets (the United States [US], the United Kingdom [UK] and Japan) to the major Asian emerging markets (India, China, Malaysia, Thailand and Indonesia) during a period from 1996 to 2015. We make use of the opening, high, low and closing prices to estimate unbiased extreme value volatility estimator and implement heterogeneous autoregressive distributed lag (HAR-DL) framework to study the spillover effects. Based on time-varying spillover analysis, we observe sudden changes in the spillover effect during the periods of major crises. Initially, we find evidence of contagion during the period of global financial crisis of 2007–2009. However, after accounting for conditional heteroscedasticity, we observe a decline in the strength of volatility transmission from developed markets to the Asian emerging markets. Moreover, the initial evidence of contagion is not detectable anymore. We also test the economic significance of the findings by implementing three trading strategies based on risk averse and risk-taking investors that make use of the forecasted variance based on HAR-DL specification. Our findings indicate that substantial average annualised gains in returns can be earned based on the lagged volatility components of the USA and the UK. JEL Classification: C32, C58, G01, G15

Keywords: Volatility spillover; Asian emerging markets; contagion; unbiased volatility estimator; structural breaks (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:18:y:2019:i:2:p:172-209

DOI: 10.1177/0972652719846308

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