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Article

Sruti Mundra and Motilal Bicchal

The purpose of this study is to assess alternative financial stress indicators for India in terms of tracing crisis events, mapping with the business cycle and the…

Abstract

Purpose

The purpose of this study is to assess alternative financial stress indicators for India in terms of tracing crisis events, mapping with the business cycle and the macroeconomic effect of stress indices.

Design/methodology/approach

The study constructs the composite indicator of systemic stress of Hollo, Kremer and Lo Duca (2012) for India using two different methods for computing time-varying cross-correlation matrix, namely, exponentially weighted moving average (EWMA) and dynamic conditional correlation-generalized autoregressive conditional heteroscedasticity (DCC-GARCH). The derived indices are evaluated with widely used, equal variance and principal component weighting indices in terms of tracing stress events, mapping with the business cycles and the macroeconomic effect. For this purpose, the study identifies various episodes of financial stress and uses the business cycle dates in the sample covering from January 2001 to October 2018.

Findings

The results suggest that stress indices based on EWMA and DCC-GARCH accurately identify the well-known stress periods and capture the recession dates and show an adverse effect on economic activity. Primarily, the DCC-GARCH-based stress index emerges as a better indicator of stress because it efficiently locates all the major-minor events, traces the build-up of stress and reverts to the normal level during stable times.

Practical implications

The DCC-GARCH-based stress index is a very useful indicator for policymakers in regularly monitoring India’s financial conditions and providing timely identification of systemic stress to avoid adverse repercussion effects of the financial crisis.

Originality/value

The 2007–2008 financial crisis and subsequent recurrent instability in the financial markets highlighted the requirement for an appropriate financial stress indicator for a timely assessment of the system-wide financial stress. To the authors’ knowledge, this is the first study that incorporates the systemic nature of financial stress in the construction of stress indices for India and provides a holistic evaluation of the financial stress from an emerging country’s perspective.

Details

Journal of Financial Economic Policy, vol. 13 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Content available
Article

Sang Hoon Kang and Seong-Min Yoon

This paper investigates the price discovery, volatility spillover, and asymmetric volatility spillover effects between the KOSPI 200 market and its futures contracts…

Open Access

Abstract

This paper investigates the price discovery, volatility spillover, and asymmetric volatility spillover effects between the KOSPI 200 market and its futures contracts market. The investigation was performed using the VECM-DCC-GARCH approach. In the case of returns, we found a significant unidirectional information flow from the futures market to the spot market; this implies that the KOSPI 200 futures market plays an important role on the price discovery in the spot market. In addition, we found a strong bi-directional casualty involving the volatility interaction between the spot and futures markets; this implies that market volatility originating in the spot market will influence the volatility of the futures market and vice versa. We also found strong asymmetric volatility spillover effects between the two markets.

Details

Journal of Derivatives and Quantitative Studies, vol. 19 no. 3
Type: Research Article
ISSN: 2713-6647

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Article

Eleftheria Kostika and Nikiforos T. Laopodis

The purpose of this paper is to investigate the short- and long-run dynamic linkages between selected cryptocurrencies, several major world currencies and major equity…

Abstract

Purpose

The purpose of this paper is to investigate the short- and long-run dynamic linkages between selected cryptocurrencies, several major world currencies and major equity indices. The results show that despite sharing some common characteristics, the cryptocurrencies do not reveal any short- and long-term stochastic trends with exchange rates and/or equity returns. The dynamics of each cryptocurrency with the Chinese Yuan appears to be more turbulent than that with the other exchange rates. Each cryptocurrency appears to follow its own trend in the global financial market and is independent of the exchange rates or the global stock markets, thus making them suitable for inclusion in global investment portfolios.

Design/methodology/approach

The cryptocurrencies examined are Bitcoin, Dash, Ethereum, Monero, Stellar and XRP. In addition, data were collected on major exchange rates with respect to the US dollar, namely, the euro, British pound, Japanese yen and Chinese Yuan. Finally, the following major stock market indices were selected: SP500, DAX, DJIA, CAC, FTSE, NIKKEI, Hang Seng and Shanghai. The study applied vector autoregressive (VAR) model and Engle’s (2002) dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) specification.

Findings

First, it was found that cryptocurrencies do not interact with each other because their correlations are weak and do not share a common long-run path; thus they are not cointegrated. Second, impulse response analysis from the VAR models indicate different reactions of each cryptocurrency to both exchange rate and equity shocks and that cryptocurrencies appear to be isolated from market-driven shocks. Third, the ups and downs in the cryptocurrencies’ dynamic conditional correlations (from the DCC-GARCH models) indicate that all cryptocurrencies were susceptible to speculative attacks and market events.

Research limitations/implications

This paper examines the dynamic linkages among the most important cryptocurrencies with major exchange rates and equity markets and, to the best of the authors’ knowledge, is the first paper to do so. Thus, interested market agents would gain valuable insights as to whether this new form of asset might be used for conducting monetary policies and portfolio construction on a global setting.

Originality/value

The paper contributes to the scant literature on the dynamic linkages among major cryptocurrencies and global financial assets. In general, given the differential relationships of each crypto with the equity markets, one could infer that they represent a decent short-run investment vehicle within a well-diversified, global asset portfolio (as they may increase the returns and reduce the overall risk of the portfolio).

Details

Studies in Economics and Finance, vol. 37 no. 2
Type: Research Article
ISSN: 1086-7376

Keywords

Content available
Article

Sang Hoon Kang and Seong-Min Yoon

This paper investigates the impact of structural breaks on volatility spillovers between Asian stock markets (China, Hong Kong, India, Indonesia, Japan, Korea, Singapore…

Open Access

Abstract

This paper investigates the impact of structural breaks on volatility spillovers between Asian stock markets (China, Hong Kong, India, Indonesia, Japan, Korea, Singapore, and Taiwan) and the oil futures market. To this end, we apply the bivariate DCC-GARCH model to weekly spot indices during the period 1998-2015. The results reveal significant volatility transmission for the pairs between the Asian stock and oil futures markets. Moreover, we find a significant variability in the time-varying conditional correlations between the considered markets during both bullish and bearish markets, particularly from early 2007 to the summer of 2008. Using the modified ICSS algorithm, we find several sudden changes in these markets with a common break date centred on September 15, 2008. This date corresponds to the collapse of Lehman Brothers which is considered as our breakpoint to define the global financial crisis. Also, we analyse the optimal portfolio weights and time-varying hedge ratios based on the estimates of the multivariate DCC-GARCH model. The results emphasize the importance of overweighting optimal portfolios between Asian stock and the oil futures markets.

Details

Journal of Derivatives and Quantitative Studies, vol. 24 no. 1
Type: Research Article
ISSN: 2713-6647

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Article

Vipul Kumar Singh and Faisal Ahmed

The purpose of this paper is to econometrically investigate the level of financial co-integration of the least developed countries (LDCs) of Asia and Pacific region. In…

Abstract

Purpose

The purpose of this paper is to econometrically investigate the level of financial co-integration of the least developed countries (LDCs) of Asia and Pacific region. In addition, the paper also tested the co-integration of LDCs with the world’s second largest economy “China.” For this, the paper employed the foreign exchange data sets of respective LDCs. It also aimed to assess the dynamic conditional correlation (DCC) between the foreign exchange rates of LDCs and China, and further, examined the past and current level of their co-relational dependence.

Design/methodology/approach

The authors created data sets namely LDCs of Asia and Pacific, LDCs of SAARC, LDCs of ASEAN, LDCs of Pacific, LDCs of SAARC and ASEAN, LDCs of ASEAN and Pacific, and LDCs of SAARC and Pacific. In addition, the authors tested the co-integration of these seven groups with China, and thus, making a total of 14 data sets. The analysis was carried out using the Johansen and Gregory-Hansen multivariate co-integration econometric techniques. To assess the DCC, multivariate DCC GARCH model was employed.

Findings

It was found that at the intra-regional level, exchange rates of LDCs of SAARC, ASEAN and Pacific were co-integrated and showed the existence of 1-3 co-integrating equations. At inter-regional level SAARC-ASEAN, ASEAN-Pacific and SAARC-Pacific were also co-integrated and showed 1-3 co-integrated equations. However, on the inclusion of China in the study, the degree of co-integration of exchange rate of China with LDCs of SAARC and ASEAN increased, while with Pacific, the result was mixed. Conditional correlation estimated of multivariate DCC GARCH model suggested that except for Afghanistan, there was an upward shift in the correlation dynamics of exchange rates of LDCs with China, post global financial crisis.

Practical implications

Asia and Pacific region constituted of 53 countries, of which 13 were LDCs. Enhanced financial integration among LDCs of Asia-Pacific region and also between LDCs and major economies of the region like China will strengthen economic and financial integration efforts in the region.

Originality/value

The present paper attempted a comparative assessment of the co-movements of the foreign exchange markets of LDCs, the countries which have remained largely neglected in academic discourses on financial integration.

Details

China Finance Review International, vol. 6 no. 2
Type: Research Article
ISSN: 2044-1398

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Article

Mohamed El Hedi Arouri and Duc Khuong Nguyen

The purpose of this paper is to propose an empirical procedure for examining the time‐varying features of cross‐market correlations in selected Gulf stock markets.

Abstract

Purpose

The purpose of this paper is to propose an empirical procedure for examining the time‐varying features of cross‐market correlations in selected Gulf stock markets.

Design/methodology/approach

The paper directly infers the cross‐market linkages from the stock data using a multivariate dynamic conditional correlation GARCH model (DCC‐GARCH). The paper attempts to date the structural breaks in the time‐paths of the conditional correlation indices to investigate whether the cross‐market comovement encompasses significant changes in nature or not.

Findings

Conditional cross‐market correlations between studied markets are shown to be time‐varying, past‐dependent and subject to structural breaks. However, the comovements are still small within the Gulf region and insignificant between the Gulf stock markets and the world market.

Research limitations/implications

Even though the paper attempted to relate the observed changes in market linkages to major economic and political events that the Gulf region experienced during the sample period, a more careful, in‐depth analysis is needed since the primary objectives of this paper consist only of measuring stock market comovements and detecting their possible structure changes.

Practical implications

For global investors, there is still room for international and regional diversification in Gulf markets, given the low degree of comovements documented in the study.

Originality/value

The application of the DCC‐GARCH model and structural change test in a linear framework appears to be suitable for studying the time‐varying properties of cross‐market linkages between markets in the Gulf region. It also provides information about the degree of financial integration of the studied markets with the world stock market through an analysis of the conditional correlation coefficients.

Details

Managerial Finance, vol. 36 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Content available
Article

Yousra Trichilli, Mouna Boujelbène Abbes and Sabrine Zouari

This paper examines the impact of political instability on the investors' behavior, measured by Google search queries, and on the dynamics of stock market returns.

Abstract

Purpose

This paper examines the impact of political instability on the investors' behavior, measured by Google search queries, and on the dynamics of stock market returns.

Design/methodology/approach

First, by using the DCC-GARCH model, the authors examine the effect of investor sentiment on the Tunisian stock market return. Second, the authors employ the fully modified dynamic ordinary least square method (FMOL) to estimate the long-term relationship between investor sentiment and Tunisian stock market return. Finally, the authors use the wavelet coherence model to test the co-movement between investor sentiment measured by Google Trends and Tunisian stock market return.

Findings

Using the dynamic conditional correlation (DCC), the authors find that Google search queries index has the ability to reflect political events especially the Tunisian revolution. In addition, empirical results of fully modified ordinary least square (FMOLS) method reveal that Google search queries index has a slightly higher effect on Tunindex return after the Tunisian revolution than before this revolution. Furthermore, by employing wavelet coherence model, the authors find strong comovement between Google search queries index and return index during the period of the Tunisian revolution political instability. Moreover, in the frequency domain, strong coherence can be found in less than four months and in 16–32 months during the Tunisian revolution which show that the Google search queries measure was leading over Tunindex return. In fact, wavelet coherence analysis confirms the result of DCC that Google search queries index has the ability to detect the behavior of Tunisian investors especially during the period of political instability.

Research limitations/implications

This study provides empirical evidence to portfolio managers that may use Google search queries index as a robust measure of investor's sentiment to select a suitable investment and to make an optimal investments decisions.

Originality/value

The important research question of how political instability affects stock market dynamics has been neglected by scholars. This paper attempts principally to fill this void by investigating the time-varying interactions between market returns, volatility and Google search based index, especially during Tunisian revolution.

Details

Journal of Capital Markets Studies, vol. 4 no. 1
Type: Research Article
ISSN: 2514-4774

Keywords

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Article

Achraf Ghorbel and Younes Boujelbene

This paper aims to employ GARCH-class models (GARCH, IGARCH and CGARCH) to estimate the volatility persistence on crude oil, US, Gulf Corporation Council (GCC), Brazil…

Abstract

Purpose

This paper aims to employ GARCH-class models (GARCH, IGARCH and CGARCH) to estimate the volatility persistence on crude oil, US, Gulf Corporation Council (GCC), Brazil, Russia, India and China (BRIC) stock markets. Also, the paper investigates the volatility spillover and the dynamic conditional correlation between crude oil, US stock index and stock indices of GCC and BRIC countries. The results prove a high degree of volatility persistence in the crude oil and stock markets. Based on the BEKK-GARCH and DCC-GARCH results, the paper finds strong evidence of the contagion effect of the oil shock and US financial crisis of 2008 on GCC and BRIC stock markets.

Design/methodology/approach

In the beginning, the paper uses univariate GARCH models to estimate the volatility persistence of the oil market, US stock market, and GCC and BRIC stock markets. Then, the paper uses a trivariate BEKK-GARCH model of Malik and Hammoudeh to examine the volatility spillover between oil market, US stock market and stock markets for GCC and BRIC countries. Finally, the paper analyses the dynamic conditional correlation between US market and each stock market of GCC and BRIC countries using the DCC-GARCH model. Also, the paper estimates the dynamic conditional correlation between oil market and all stock markets.

Findings

The results indicate the contagion effect of the oil shock and US financial crisis of 2008 on the GCC stock markets which are among the most important oil-exporting countries and also on BRIC stock markets which are among the emergent countries which are characterized by high economic growth level.

Originality/value

The contribution of this paper is to investigate the existence of contagion effect between oil market, US stock market and two panels of emerging stock markets which have different economic characteristics, the GCC and BRIC countries, during the oil shock and US financial crisis period of 2008-2009.

Details

International Journal of Energy Sector Management, vol. 7 no. 4
Type: Research Article
ISSN: 1750-6220

Keywords

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Article

Wasim Ahmad, N.R. Bhanumurthy and Sanjay Sehgal

This paper aims to examine the contagion effects of Greece, Ireland, Portugal, Spain and Italy (GIPSI) and US stock markets on seven Eurozone and six non-Eurozone stock…

Abstract

Purpose

This paper aims to examine the contagion effects of Greece, Ireland, Portugal, Spain and Italy (GIPSI) and US stock markets on seven Eurozone and six non-Eurozone stock markets.

Design/methodology/approach

In this paper, a dynamic conditional correlation (DCC) model popularly known as DCC-GARCH (Generalized Autoregressive Conditional Heteroscedasticity) model given by Engle (2002) is applied to estimate the DCCs across sample markets.

Findings

Analyzing the Eurozone crisis period, the empirical results suggest that among GIPSI stock markets, Spain, Italy, Portugal and Ireland appear to be most contagious for Eurozone and non-Eurozone markets. The study finds that France, Belgium, Austria and Germany in Eurozone and UK, Sweden and Denmark in non-Eurozone are strongly hit by the contagion shock.

Practical implications

The findings of the study have significant implications for the concerned regulatory authorities, as it may provide an important direction for further policy research with regard to financial integration in the European Union (EU). From global investors’ perspective, the EU-based diversification strategies seem to be inefficient especially during Eurozone crisis.

Originality/value

To the best of the authors’ knowledge, this is the first study that examines the issue of financial contagion of Eurozone crisis for a large basket of stock markets of European countries comprising seven Eurozone and six non-Eurozone markets for the period 2009-2012. The study uses the Markov regime switching model to identify crisis period and utilizes the DCC estimates of DCC-GARCH to examine the patterns of financial contagion. The finding of this study is quite interesting and is different in several ways than existing studies in the literature.

Details

Studies in Economics and Finance, vol. 31 no. 3
Type: Research Article
ISSN: 1086-7376

Keywords

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Article

Mehmet Balcilar, Gozde Cerci and Riza Demirer

The purpose of this paper is to examine the international diversification benefits of Islamic bonds (Sukuk) for equity investors in conventional stock markets. The authors…

Abstract

Purpose

The purpose of this paper is to examine the international diversification benefits of Islamic bonds (Sukuk) for equity investors in conventional stock markets. The authors compare the diversification benefits of these securities with their conventional alternatives from advanced and emerging markets. Compared to conventional bonds, Sukuk are backed by tangible assets and carry both bond and stock-like features. Furthermore, the Sharia-based limitations limit the risk in these securities as a result of ethical investing rules. The regime-based model provides insight to possible segmentation (or integration) of these securities from global markets during different market states.

Design/methodology/approach

Risk spillover effects across conventional and Islamic stock and bond markets are examined using a Markov regime-switching GARCH model with dynamic conditional correlations (MS-DCC-GARCH). Weekly return series for conventional (advanced and emerging) and Islamic stock and bond indices are examined within a regime-dependent specification that takes into account low, high, and extreme volatility states. The DCC are then used to establish alternative diversified portfolios formed by supplementing conventional and Islamic equities with conventional and Islamic bonds one at a time.

Findings

Asymmetric shocks are observed from conventional stocks and bonds into Islamic bonds (Sukuk). Compared to emerging market bonds, Sukuk are found to display a different pattern in the transmission of global market shocks. The analysis of dynamic correlations suggests a low degree of association between Islamic bonds and global stock markets with episodes of negative correlations observed, particularly during market crisis periods. Portfolio performance analysis suggests that Islamic bonds provide valuable diversification benefits that are not possible to obtain from conventional bonds.

Originality/value

This study provides comprehensive analysis of volatility interactions and dynamic correlations across Islamic and conventional markets within a regime-based framework and provides insight to whether these securities could serve as safe havens or diversifiers for global investors. The findings have significant implications for global diversification strategies, particularly during market crisis periods.

Details

Managerial Finance, vol. 42 no. 7
Type: Research Article
ISSN: 0307-4358

Keywords

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