Volatility Contagion across the Equity Markets of Developed and Emerging Market Economies
SHARE THIS PAGE
Equity fund flows are a channel for spillover of variance risk premiums in the equity markets in the United States to those in other developed economies.
Using variance risk premiums (VRPs) nonparametrically calculated from equity markets in selected major developed economies and emerging market economies (EMEs) over 2007‒2015, we document the correlation of VRPs across the markets and examine whether equity fund flows work as a path through which VRPs spill over globally. First, we find that VRPs tend to spike up during market turmoil such as the peak of the global financial crisis and the European debt crisis. Second, we find that all cross-equity market correlations of VRPs are positive, and that some economy pairs exhibit high levels of the correlation. In terms of volatility contagion, we find that an increase in VRPs in the United States significantly reduces equity fund flows to other developed economies, but not those to EMEs, in the period after the global financial crisis. Two-stage least squares estimation results show that equity fund flows are a channel for spillover of VRPs in the United States to VRPs in other developed economies.
WORKING PAPER NO: 590
Also in this Series
- Mainstreaming the Social Indicators of the Seafood Stewardship Index for Greater Equity in the Asian Seafood and Aquaculture Industry
- Back to School After COVID-19 Pandemic: Resumption or Transitional Disruption?
- The Rule of Law Approach for More Resilient Institutions: Judicial Accountability and Independence, and Global Economic Activities