Country ETF returns and volatility spillovers in emerging stock markets, Europe and USA

Abstract

Purpose – The purpose of this paper is to investigate the linkages among equity exchange traded funds (ETF) returns and transmission of volatilities of the USA, Europe and key emerging countries’ stock markets. Standard & Poor’s 500 (spy) and iShares Europe are used to represent the USA and European stock markets, the emerging market part of the data set consists of daily returns of equity ETF representing broad equity market indices of the BRIC countries (Brazil, Russia, India and China); the mist countries (Mexico, Indonesia, South Korea and Turkey) and South Africa and covers the period of February 3, 2012-February 28, 2014. Design/methodology/approach – The paper utilizes multi-variate auto-regressive moving-averages (MARMA) methodology to study equity market returns and spillovers. Second, generalized auto-regressive conditional heteroskadasticity (GARCH) modeling is employed to model volatility persistence and transmissions. Findings – The findings include the existence of significant co-movement of returns among all country ETFs; however, despite increasing interdependencies among the global stock markets there are still very good opportunities for diversification. For example, USA and Europe based investors may do well to ignore opportunities in each other’s markets but can realize diversification benefits by investing in ETFs representing China, South Africa and Turkey. As far as volatilities are concerned, the findings indicate that no ETF volatility is transmitted from the sample countries to USA, Brazil, China and South African stock markets. Also, US market volatility is transmitted to India, Russia, Mexico and Turkey while European volatility spills over to Mexico and South Korea. The presence of spillovers among stock markets’ return series and persistence of volatilities are useful to investors interested in diversifying their portfolios and to traders/fund managers who are interested in maximizing returns. Research limitations/implications – The implications include: first, investors should not only rely on current domestic news to guide their investment decisions, but also take into consideration international news for there are substantial spillovers. Second, given that volatilities can proxy for risk, there are lessons for both individual and institutional investors in terms of further examining pricing securities, hedging and other trading strategies as well as framing regulatory policies. Third, investors should be able to ride the financial cycle by following closely monetary policies of the FED and European Central Bank and resulting credit expansion or contraction since research indicates (and as corroborated in this study) equity prices are linked to VIX which is also correlated with capital flows and credit expansion and interest rates. Limitations include: first, the investigation could be expanded to include individual countries in Europe instead of using one Europe-wide ETF. As ETFs for other emerging markets become available it is also possible to include additional countries. Second, ETFs may not be the best vehicles for diversification. Originality/value – Methodology (MARMA and GARCH) is widely used for analyzing financial data. The use of BRIC and MIST countries and the interaction among them may be novel. Spillovers among emerging financial markets is a fairly new area. Typically, the authors see studies of spillovers from the developed countries to the developing ones. The data period is important since it covers both credit expansion and contraction (or the start of it) by the FED and is current.

Return and volatility spillovers in equity markets: An investigation using various GARCH methodologies

“…Once again, these results are similar to findings of other studies (Abbas et al, 2013;Beirne et al, 2010;Frankel & Roubini, 2001;Yavas & Rezayat, 2016).…”

“…What these result indicate is that German, Russian, and UK investors appear to have limited opportunities since the German market, Russian market, and UK market are positively correlated with all of the other markets included in our samples. (Kiymaz, 2003), in Europe (Gray, 2009), and in emerging markets of BRIC and MIST (Yavas & Rezayat, 2016).…”

“…The main finding has been that while correlations among equity markets have been increasing, there are still opportunities for investors to benefit from portfolio diversifications by investing in different country equity markets (Grosvenor & Greenidge, 2010;Kiymaz, 2003;Kumar, 2013;Yavas & Dedi, 2016;Yavas & Rezayat, 2016). After the 2007-2008 global financial crisis, capital flows across the world responded to policy actions by the major countries.…”

Research-in-Progress:data Never Sleep: A Marketing Perspective

“…Therefore, the growth in the global integration of financial markets has given rise to many studies that investigate the mechanism through which equity market movements are transmitted around the world. These studies make it clear that while real economic conditions and equity market performances are linked, the performance of equity markets also vary based on international factors, so that market performance is not perfectly correlated across countries (Kiymaz, 2002;Yavas & Rezayat, 2016;Yavas & Dedi, 2016). They also indicate that the markets become more closely correlated with unexpected events or shocks (Rezayat &Yavas, 2006;Gray, 2009 Even though we have chosen to include in our sample major European countries and the USA due to their closer interaction, two recent papers, one from the IMF and one from the Bank for International Settlements (BIS), reveal the extent of the return co-movements over the past decade in Asia.…”

Stock Returns, Volatility and Mean Reversion in Emerging and Developed Financial Markets

“…Such high risk returns, the high anticipation of investment returns in these markets. However, scholars (e.g., Yang, Liu 2016;Yavas, Rezayat 2016;Mosquera et al 2016;Harvey 1995;Bekaert 1995;etc. ) have documented counter evidence.…”