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Open Access
Article
Publication date: 17 May 2022

Aswini Kumar Mishra, Saksham Agrawal and Jash Ashish Patwa

The study uses the multivariate GARCH-BEKK model (which was first proposed by Baba et al. (1990) and then further developed by Engle and Kroner (1995)) to examine the…

Abstract

Purpose

The study uses the multivariate GARCH-BEKK model (which was first proposed by Baba et al. (1990) and then further developed by Engle and Kroner (1995)) to examine the return and volatility spillover between India and four leading Asian (namely, China, Japan, Singapore and Hong Kong) and two global (namely, the United Kingdom and the United States) equity markets.

Design/methodology/approach

The study employs a multivariate GARCH-BEKK model to quantify return correlation and volatility transmission across the pre- and post-2008 global financial crisis periods (apart from other conventional time series modelling like cointegration, Granger causality using vector error correction model (VECM)).

Findings

The results show a tendency of the Indian stock market index to move along with the US and Hong Kong market indices. The decrease in the value of the co-integration coefficient during the recession was explained by reduced investor confidence in developing countries. The result further shows a clear distinction in terms of volatility spillover between the Asian market vis-a-vis US and UK markets. Volatility transmission from India to Asian markets was found to be significantly higher as compared to the US and UK. So also, the study’s results show a puzzling result giving us comparable co-integration ranks for phase 2 (expansion) and phase 3 (slow-down) of the business cycle in most cases.

Research limitations/implications

In Granger causality testing, the results were unable to ascertain the difference between phase 2 (expansion) and phase 3 (slowdown). However, the multivariate GARCH (MGARCH)-BEKK model showed a clear reduction in volatility transmission to NIFTY50 (is the flagship index on the National Stock Exchange of India Ltd. (NSE)) as India entered slow-down. This shows that the Indian economy does go through different business cycles, and the changes in parameters hence prove hypothesis 3 to be true with respect to volatility transmission to India from International markets.

Originality/value

The results show that for all countries, the volatility transmitted to India increases significantly going from phase 1 (recession) to phase 2 (expansion) and reduces again once the countries enter slow-down in phase 3 (slowdown). This shows that during expansion shocks and impulses in international markets affect the Indian markets significantly, supporting the increase in co-integration in phase 2 (expansion). During expansion, developing markets like India become profitable for investors, due to the high growth rate when compared to developed countries. This implies that a significant amount of capital enters Indian markets, which is susceptible to the volatility of international markets. The volatility transmission from India to the US and UK was insignificant in phase 1 (recession and recovery) and phase 3 (slow-down) showing a weak linkage between the markets during volatile time periods.

Details

Journal of Economics, Finance and Administrative Science, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2077-1886

Keywords

Open Access
Article
Publication date: 31 May 2012

Yuen Jung Park

This paper investigates the information content of implied volatilities inferred from individual stock options quoted over-the-counter (OTC). First, we examine whether the…

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Abstract

This paper investigates the information content of implied volatilities inferred from individual stock options quoted over-the-counter (OTC). First, we examine whether the implied volatility has better explanatory power than historical volatility for forecasting future realized volatility of the underlying stock return. Next, we analyze the properties of volatility spreads, the difference between implied volatilities and realized volatilities. Using near-the-money options for 10 firms over the sample period from April 2005 to April 2010, we first demonstrate that the implied volatilities for most firms don’t have additional information beyond what are already contained in historical volatilities. However, the implied volatilities with some specific remaining maturities for two firms dominate historical volatilities in explaining the future realized volatilities. Second, we find that during the period before global financial crisis, the implied volatilities are systematically lower than the future realized volatilities whereas this reversal disappears after the year 2008. This finding suggests that there’s a possibility of the risk loving behavior of the investors in OTC individual stock options market during the pre-global crisis period. Finally, through the comparative analysis of the KOSPI200 index options quoted OTC over the same sample period, we conclude that the OTC individual stock options market has distinctive characteristics like the KRW/USD OTC currency options market.

Details

Journal of Derivatives and Quantitative Studies, vol. 20 no. 2
Type: Research Article
ISSN: 2713-6647

Keywords

Article
Publication date: 1 April 2001

I. Nel and W. de K Kruger

The purpose of this research is to determine whether the trading of equity index futures contracts on the South African Futures Exchange (SAFEX) results in an increase in…

1332

Abstract

The purpose of this research is to determine whether the trading of equity index futures contracts on the South African Futures Exchange (SAFEX) results in an increase in the volatility of the underlying spot indices. Since equity index futures contracts were first listed in the USA in 1975, various studies have been undertaken to determine whether the volatility of shares in the underlying indices increases as a result of the trading of such futures contracts. These studies have lead to the development of two schools of thought: [a] Trading activity in equity index futures contracts leads to an increase in the volatility of index shares. [b] Trading activity in equity index futures contracts does not lead to an increase in the volatility of the index shares and could in fact lead to greater stability in equity markets. Although some evidence of higher volatility in expiration periods was found, volatility in the expiration periods was not consistently higher than in the corresponding pre‐expiration period.

Details

Meditari Accountancy Research, vol. 9 no. 1
Type: Research Article
ISSN: 1022-2529

Keywords

Article
Publication date: 20 July 2015

Raghbendra Jha and Varsha S. Kulkarni

The purpose of this paper is to amend the New Keynesian Phillips Curve (NKPC) model to include inflation volatility. It provides results on the determinants of inflation…

Abstract

Purpose

The purpose of this paper is to amend the New Keynesian Phillips Curve (NKPC) model to include inflation volatility. It provides results on the determinants of inflation volatility and expected inflation volatility for ordinary least squares and autoregressive distributed lags (1,1) models and for change in inflation volatility and change in expected inflation volatility using error correction mechanism (ECM) models. Output gap affects change in expected inflation volatility alone (in the ECM model) and not in the other models. Major determinants of inflation volatility and expected inflation volatility are identified. To the best of the authors knowledge this is the first paper to augment the NKPC to include inflation volatility.

Design/methodology/approach

Recent analysis has indicated the importance of inflation volatility for the monetary transmission mechanism in India (Kapur and Behera, 2012). In the analysis of such monetary policy mechanisms the NKPC has proved to be a useful tool. Thus Patra and Ray (2010) for India and Brissimis and Magginas (2008) for the USA find considerable support for the standard NKPC. The purpose of this paper is to synthesize and integrate these two models by extending the standard NKPC framework to include inflation volatility and test its significance for the case of India.

Findings

In the case of inflation volatility output gap, lagged output gap and lagged inflation volatility are all insignificant. The level of inflation has a negative significant impact whereas the level of expected inflation has a positive and significant impact. In the case of expected inflation volatility lagged output gap has a negative and significant impact, the price level has a positive and significant impact whereas expected price has a negative and weakly significant impact. ECM reveals change in inflation variability falls significantly with lagged inflation volatility and lagged inflation and less significantly with change in expected inflation. It rises with lagged expected inflation although the coefficient is only weakly significant. Lagged output gap and change in output gap are insignificant.

Originality/value

This paper makes two original contributions. First, it extends the New Keynesian framework to include inflation volatility. Second, it estimates this model for India. To the best of the authors knowledge this is the first paper to make these contributions.

Details

International Journal of Emerging Markets, vol. 10 no. 3
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 1 April 2000

ALVIN KURUC

The development of standardized measures of institution‐wide volatility exposures has so far lagged that for measures of asset price and interest‐rate exposure—largely…

Abstract

The development of standardized measures of institution‐wide volatility exposures has so far lagged that for measures of asset price and interest‐rate exposure—largely because it is difficult to reconcile the various mathematical models used to value options. Recent mathematical results, however, can be used to construct standardized measures of volatility exposure. We consider here techniques for reconciling “vegas” for financial options valued using stochastic models that may be mathematically inconsistent with each other.

Details

The Journal of Risk Finance, vol. 2 no. 1
Type: Research Article
ISSN: 1526-5943

Article
Publication date: 15 June 2012

Ritab Al‐Khouri and Abdulkhader Abdallah

The purpose of this paper is to examine whether stock market liberalization creates excess stock return volatility in the Qatar Exchange (QSC).

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Abstract

Purpose

The purpose of this paper is to examine whether stock market liberalization creates excess stock return volatility in the Qatar Exchange (QSC).

Design/methodology/approach

The study utilizes two methods, simple analysis of variance and the EGARCH model with dummy variables.

Findings

Results reveal no change in market volatility following the partial removal of the restrictions on foreign participation. Results suggest, however, that the degree of persistence in volatility is high, which implies that once volatility increases it remains high over a long run. In addition, conditional volatility tends to rise when the absolute value of the standardized residuals was large. While, contrary to what has been found in the literature, the return volatility seems to be symmetric.

Research limitations/implications

The finding of volatility persistence and clustering might imply an inefficient stock market. Therefore, policy makers should emphasize and direct their attention toward increasing the efficiency of the stock market.

Practical implications

Being able to make predictions about financial market volatility is of special importance to investors and policy makers since it makes available to them a measure of risk exposure in their investments and decisions.

Originality/value

This paper provides a contribution to the empirical literature on stock market volatility. It is the only study, to the authors' knowledge, that investigates the issue of QSC liberalization and volatility. The authors believe that QSC has its own unique characteristics, and the results of the study depend mainly on the market's specific conditions, the quality of its financial institutions and the extent of financial liberalization obtained.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 5 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 1 December 2005

Frederick (Fengming) Song, Hui Tan and Yunfeng Wu

The Chinese stock market is a typical emerging market with special features that are very different from those of mature markets. The objective of this study is to…

6052

Abstract

Purpose

The Chinese stock market is a typical emerging market with special features that are very different from those of mature markets. The objective of this study is to investigate whether and how these features affect the volatility‐volume relation for Chinese stocks.

Design/methodology/approach

This paper examines the roles of the number of trades, size of trades, and share volume in explaining the volatility‐volume relation in the Shanghai Stock Exchange with high frequency trade data used.

Findings

The results confirm that the volatility‐volume relation is driven mainly by the number of trades on the Chinese stock market. The number of trades explains the volatility‐volume relation better than the size of trades. Furthermore, some results are obtained that differ from those of mature markets, such as the US market. The results show that the second largest sized trades affect the volatility more than other trades on the Chinese market.

Originality/value

The results show that, in the Shanghai Stock Exchange, informed traders camouflage their private information or manipulation behavior through the second largest sized trades. The results may have important implications for work explaining the volatility‐volume relation on the Chinese stock market, further providing a reference by which to regulate emerging markets.

Details

The Journal of Risk Finance, vol. 6 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 15 May 2009

Mahalia Jackman, Roland Craigwell and Winston Moore

The purpose of this paper is to investigate the potential link between remittances and economic volatility in small island developing states.

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Abstract

Purpose

The purpose of this paper is to investigate the potential link between remittances and economic volatility in small island developing states.

Design/methodology/approach

The paper estimates a panel data model using a database containing 20 small island developing states (SIDS) observed over annual intervals between 1986 and 2005.

Findings

The results suggest that, in general, remittance flows have a stabilising influence on output and investment volatility. However, given the importance of these flows to SIDS, the volatility of remittances also has a significant and positive impact on both investment and consumption volatility.

Practical implications

The policy implications of the study's findings is that SIDS (similar to how oil‐producing nations take oil price fluctuations into account when considering policy changes) may have to monitor and forecast future remittance flows and take these projections into account when making changes to either their monetary or fiscal policy stance.

Originality/value

Workers' remittances have grown dramatically worldwide, particularly in SIDS, where they constitute one of the main sources of foreign exchange. Given the importance of these flows to economic growth and development in these countries, this study examines the potential link between remittances and economic volatility.

Details

Journal of Economic Studies, vol. 36 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Open Access
Article
Publication date: 31 August 2014

Sun-Joong Yoon

This study verifies the existence of implied volatility distortion by the rapid growth of structured products such as Equity Linked Securities (ELS) in Korean financial…

9

Abstract

This study verifies the existence of implied volatility distortion by the rapid growth of structured products such as Equity Linked Securities (ELS) in Korean financial markets and provides the policy implications to overcome such a distortion. The most ELS products issued in Korea have a step-down auto-callable payoff structure consisting of short position in down-and-in barrier put options and long position in digital call options. Financial companies which have issued ELS are exposed to the volatility risk, i.e. long vega position, and tend to execute the volatility transactions of short vega. For instance, the financial companies issue Equity-Linked Warrants or sell listed/over-the-counter vanilla options, both of which have short position in volatility risk. Accordingly, the demand for selling volatility is stronger than for buying volatility in the Korean financial markets. According to the empirical results, we conform that the rapid growth of the ELS products induces the pressure for lowering volatility and furthermore, the volatility spreads, defined as the difference between implied volatility and realized volatility, also decrease with respect the amount of the newly issued ELS. Lastly, to mitigate the volatility distortion effect, we suggest to list VKOSPI-related derivatives securities such as VKOSPI futures and options, which in turn balance the trading demands for selling and buying volatilities.

Details

Journal of Derivatives and Quantitative Studies, vol. 22 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 May 2011

Byung Jin Kang

This paper investigate the information content of implied volatilities derived from KRW/USD OTC currency options. First, we examined the explanatory power of implied…

4

Abstract

This paper investigate the information content of implied volatilities derived from KRW/USD OTC currency options. First, we examined the explanatory power of implied volatilities in forecasting future realized volatilities of the spot exchange rates. Next, we examined the dynamic properties of volatility spreads, the difference between implied volatilities and realized volatilities, observed in KRW/USD currency option markets. Using the sample data from January 2006 through March 2010, we first find that even though the implied volatilities have a little explanatory power in forecasting future realized volatilities, they don't improve the information content of simple historical volatilities at all. Second, this paper finds that during the period before global financial crisis in 2008, the implied volatilities are consistently lower than the realized volatilities. This suggests that we cannot exclude the possibility of risk seeking behavior of the investors in KRW/USD OTC currency option markets at that time. Finally, from the comparative analysis with KOSPI 200 index options for the same sample period, we confirmed that our empirical results are uniquely observed only in KRW/USD OTC currency option markets.

Details

Journal of Derivatives and Quantitative Studies, vol. 19 no. 2
Type: Research Article
ISSN: 2713-6647

Keywords

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