Volatility transmission: what do Asia‐Pacific markets expect?

Abstract

Purpose

The purpose of this paper is to investigate the international information transmission of return and volatility spillovers from US and Japan markets to Asia‐Pacific markets using daily stock market return data covering the period (1991‐2004).

Design/methodology/approach

This paper considers a volatility spillover model by applying a bivariate Baba, Engle, Kraft and Kroner‐Generalized Autoregressive Conditional Heteroskedastic model, for each of the Asia‐Pacific countries against the Japan and the USA using daily returns for the period (1991‐2004). Splitting the sample into two non‐overlapping sub‐samples, the paper investigates whether the efforts for more economic, monetary and financial integration have fundamentally altered the sources and intensity of volatility spillovers to the individual stock market.

Findings

In the majority of the markets under scrutiny, we provide evidence of direct volatility spillovers, running mainly from the Japanese and US markets and pointing to more rapid information transmission during the recent years. First, the volatility of the Asia‐Pacific markets is becoming influenced more by the US market for the recent years. Second, for international investors to get profits from the returns of Asia‐Pacific securities, it is necessary to pay attention to the US market directly. Third, Korea, Singapore and Hong Kong are among the most Asia‐Pacific markets vulnerable to shocks from US investors due to the large ratio of portfolio holding. However, implementing global hedging strategies on Asia‐Pacific markets requires the information concerning the Japanese volatility behaviour.

Originality/value

This paper should be of interest to a broad practitioners and academics including those interested in modelling volatility for financial market risk management.

Citation

Shamiri, A. and Isa, Z. (2010), "Volatility transmission: what do Asia‐Pacific markets expect?", Studies in Economics and Finance, Vol. 27 No. 4, pp. 299-313. https://doi.org/10.1108/10867371011085147