A study on stock market volatility and spillover effect in selected developed and emerging asian markets

Abstract

Stock markets serve as the economic barometers. The relationship between the two capital markets can be studied as a proxy to understand the relation between the two economies. The movement of stock market not only reflects the nation s economic condition but also the confidence level the domestic and foreign investors have in an economy. The increase in integration between the global economies has resulted in convergence and co movement. The purpose of this study is to examine the presence of volatility and test the uniformity in the extent of volatility, to investigate the possible contagion effect between the selected developed and emerging market, to check for the spillover effect between the Indian stock market and the other five sampled markets and finally inspect the relationship between the volume and volatility in the capital markets of Hong Kong, Japan, Singapore, India, China and Philippines. newlineStratified- convenience sampling technique is used to pick the samples and daily index values are taken from the major index of these countries for a period of seven years. The time series data were tested for stationarity and normality using ADF, PP tests and Jarque-Bera test. Returns, SD, ARIMA, ARCH, GARCH, BEKK-GARCH, Granger causality test, VAR model and Variance decomposition techniques are used for the analysis. The empirical analysis revealed that the volatility exists in all the stock markets and the extent of volatility varies between the markets and the economies experience different magnitude of volatility with time. Volatility is present in the return from the stock markets and volatility clustering was detected with the help of GARCH model meaning the index behavior is influenced by previous information. Bidirectional spillover of Shock and volatility is seen between NSE and the other five stock indices. The response of volatility to its own shock is comparatively higher and is found to marginally increase from periods one to ten than the shock due to its trading volume and the impact of Volume is relatively lesser on volatility in majority of the stock markets. newlineThe financial stock markets are integrated beyond the geographical borders and the shock in one market impacts the returns from the other market. With a better understanding of the relation between the markets and volatility and volume, the investors can make strategy to trade, by observing the volatility signals in one market, suitable positions can be taken in the other. This study is limited to only six developed and emerging Asian markets and for a period newlineof seven years. The analysis is entirely based on the stock market index performance and its relationship with the other selected markets; macroeconomic factors and political influence on the stock market are not considered for analysis. newline