Time varying volatility indices and their determinants: Evidence from developed and emerging stock markets

• Published in: International review of financial analysis 2018-11, Vol.60, p.115-126
• Main Authors: Prasad, Nalin, Grant, Andrew, Kim, Suk-Joong
• Format: Article
• Language: English
• Subjects: Realized volatility; Spillover index; Stock market spillovers; VAR; Volatility transmission
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2018.09.006

This paper investigates spillovers across 16 major stock markets utilizing the high frequency data based Realized volatility estimator (Andersen et al., 2003) and the spillover index methodology put forward by Diebold and Yilmaz (2012). We find that spillovers increased dramatically during the 2008 global financial crisis and the European sovereign debt crisis that followed as expected. Differences arise when comparing directional spillovers for individual stock markets. We find that the larger stock markets from the advanced western economies, particularly the US, dominate volatility transmission to other markets. Emerging markets such as China, India and Brazil are still relatively isolated, though their contributions to global volatility spillovers have increased considerably after 2006. We also investigate potential determinants of net spillovers between markets and find that the level of volatility in one market relative to that in other markets is the most important factor in increasing spillovers transmitted. Other important determinants include relative bond yield returns, relative stock market turnover, relative FX market volatility and macroeconomic news indices. •This paper investigates spillovers across 16 major stock markets using the Diebold and Yilmaz (2012)’s spillover index methodology.•We use daily realized volatilities calculated from five-minute intervals to produce the spillover indices.•Larger stock markets from the advanced western economies dominate volatility transmission to other markets.•Larger emerging markets’ contributions to global spillovers have increased considerably after 2006.•Relative bond yield returns, stock market turnover, FX volatility, and macro news indices explain the spillover indices.