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Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market?

Jozef Baruník (), Evžen Kočenda () and Lukas Vacha ()

No 13, FinMaP-Working Papers from Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

Abstract: Asymmetries in volatility spillovers are highly relevant to risk valuation and portfolio diversification strategies in financial markets. Yet, the large literature studying information transmission mechanisms ignores the fact that bad and good volatility may spill over at different magnitudes. This paper fills this gap with two contributions. One, we suggest how to quantify asymmetries in volatility spillovers due to bad and good volatility. Two, using high frequency data covering most liquid U.S. stocks in seven sectors, we provide ample evidence of the asymmetric connectedness of stocks. We universally reject the hypothesis of symmetric connectedness at the disaggregate level but in contrast, we document the symmetric transmission of information in an aggregated portfolio. We show that bad and good volatility is transmitted at different magnitudes in different sectors, and the asymmetries sizably change over time. While negative spillovers are often of substantial magnitudes, they do not strictly dominate positive spillovers. We find that the overall intra-market connectedness of U.S. stocks increased substantially with the increased uncertainty of stock market participants during the financial crisis.

Keywords: volatility; spillovers; semivariance; asymmetric effects; financial markets (search for similar items in EconPapers)
JEL-codes: C18 C58 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mst
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: Asymmetric connectedness on the U.S. stock market: Bad and good volatility spillovers (2016) Downloads
Working Paper: Asymmetric Connectedness on the U.S. Stock Market: Bad and Good Volatility Spillover (2015) Downloads
Working Paper: Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market? (2014) Downloads
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