Volatility Spillover among Japanese Sectors in Response to COVID-19

Abstract

This study clarifies how risks spread across economic sectors and indicates the sectors that are the most affected to help investors with asset allocation and to support them in risk management. Although the Japanese stock market is one of the relatively large global stock markets, no studies have explored volatility spillovers among its sectors. Using the forecast error variance decomposition of the vector autoregressive model, this study examines the volatility spillovers among sectors classified on the Tokyo Stock Exchange. Our findings show that the pattern of volatility spillovers across sectors in the Japanese stock market differs between a few years preceding the coronavirus disease 2019 (pre-COVID-19), from 2014 to 2019, and during the COVID-19 period, in 2020. Although the energy resources and bank sectors are risk receivers in the pre-COVID-19 period, these sectors are risk transmitters during the COVID-19 period. We also find that volatility spillovers in the Japanese stock market are mainly driven by negative realized semivariance. These results are useful for asset allocation and risk management.

Pandemics and Stock Price Volatility: A Sectoral Analysis

“…These impacts, driven in part by information flows (Smales 2021;Huberman and Regev 2001) have been studied over the last several years by examining various indicators of financial market activity. These indicators include liquidity (Zhang et al 2020;Haroon and Rizvi 2020a;Baig et al 2020), risk and volatility (Shigemoto and Morimoto 2022;Setiawan et al 2021;Khan et al 2023;Albulescu 2020;Jin et al 2022;Wu et al 2022;Zaremba et al 2020;Haroon and Rizvi 2020b), financial performance (Mirza et al 2020), stock price returns (Ramelli and Wagner 2020;Baker et al 2020), contagion (Akhtaruzzaman et al 2021;Okorie and Lin 2021), uncertainty (Salisu et al 2020;Lyócsa and Molnár 2020), sentiment (Sergi et al 2021;Cox et al 2020;Harjoto et al 2021) and new financial instruments (Corbet et al 2020). Other studies examine the effect of policy responses to the pandemic on stock market behavior (Burdekin and Harrison 2021;Bouri et al 2021;Cox et al 2020).…”