This dissertation investigates the dynamics of mean and volatility spillovers from the U.S. and three large (regional) Asia-Pacific stock markets to ten small (local) ones from June 2008 to May 2013. After a brief introduction to the main purposes and contributions of my research in Chapter 1, I examine the impact of lagged American and regional returns on the local markets in Chapter 2. By building up a univariate autoregressive model and treating lagged U.S. and regional returns as exogenous variables, I find that the local markets have statistically significant exposure to lagged returns of their own and the U.S. market only. The empirical results suggest that lagged American returns have exerted considerable mean spillover impact upon most of the local markets, whereas the large Asia-Pacific markets involved in this study have few such impacts. I study the linkage between the U.S. market and each of the regional markets in Chapter 3 by employing two specifications of the bivariate GARCH process—the BEKK and general dynamic covariance (DC) models—to capture common features of equity return data. Based on the results of carefully constructed diagnostic tests, the BEKK model is demonstrated to be more appropriate for the U.S.–China and U.S.–Japan cases, and the dynamic covariance model for the U.S.–Australia case. In Chapter 4, I discuss time-varying correlation of a local market with the U.S. market and with each regional market by proposing three Markov-switching shock spillover models. A comparison of model performance is drawn based on a series of model selection criteria. In fourteen cases, the local market is found to be more sensitive to regional shocks. Disturbances from two regional markets account for a higher proportion of local variance than those of U.S. origin. I conclude that the regional center, although having little mean spillover effect upon the local markets, has become increasingly influential in volatility transmission. Possible extended studies in the future as well as main findings in the preceding chapters are summarized in Chapter 5.

The purpose of this study is to examine the volatility spillover among a country&rsquo / s foreign exchange, bond and stock markets and the volatility transmission from the global bond, stock and commodity markets to these local financial markets. The sample for the study includes data from both emerging and developed economies in the time period between 2004 and 2011. A multivariate GARCH methodology with the BEKK representation is applied for the local financial markets and global variables are included as exogenous variables into the model. The volatility integration of the financial markets of the emerging economies is stronger compared to the integration of the developed economies. Global variables have a spillover effect on the developed markets only after the global financial crisis, whereas they significantly affect the volatility in emerging markets for both the pre- and post-crisis period. North American countries in the sample, U.S. and Mexico, have low local volatility integration in the pre-crisis era and the integration rises in the post-crisis period. Moreover, they are more open to the internal and global short-term shocks in the post-crisis period. Germany and Turkey are the representatives of the EMEA (Europe, Middle East and Africa) region and they have high local market integration and are open to global shocks for both sub-periods. Far Eastern markets, Japan and Korea, also have high local market integration and their vulnerability to the global effects is large and getting larger for the post-crisis period. The most important limitation of this thesis is the difficulty of reaching sharp generalizations due to the small number of countries analyzed. This limitation can be addressed by the inclusion of a larger number of geographically dispersed countries. The most noteworthy originality of this study is the addition of the exogenous global variables for modeling volatility spillovers. Furthermore, comparison of results for emerging versus developed markets and the pre- versus post-crisis periods is another contribution of this study to the existing literature. The findings of this study can be used by investors interested in assessing the risks of investing internationally.

This study examines the linkages between output growth and output volatility in the G7 countries over the period 1958M2-2013M8. Using the VAR-based spillover index approach by Diebold and Yilmaz (2012) we find that: i) output growth and volatility are highly intertwined; ii) spillovers have reached unprecedented levels during the global financial crisis; and iii) the US has been the largest transmitter of growth and volatility shocks. Generalized impulse response analyses suggest moderate growth spillovers and sizable volatility spillovers across countries. Cross-variable effects indicate that volatility shocks lead to lower growth, while growth shocks reduce output volatility.

L’objectif de cette thèse est d’étudier les divers aspects de la crise financière 2007-09. Dans l’ensemble, les deux types d’objectifs sont poursuivis dans cette thèse: le premier objectif est de déchiffrer les liaisons entre les différents marchés boursiers, immobiliers et pétroliers afin d’évaluer les retombées du rendement et de la volatilité. L’accent dans ce champ est mis sur le niveau d’intégration entre les marchés pendant différents périodes de temps y compris la crise. Ce domaine est examiné par le développement de trois essais distincts. Le premier essai examine la déclaration du gouvernement Russe affirmant que ce sont les chocs initiés par les marchés étrangers qui ont été essentiellement responsables de la panique sur leur marché boursier pendant la période Septembre - Octobre 2008. En utilisant l’approche de la contagion financière, les résultats indiquent que le marché boursier Russe est intégré faiblement avec les marchés Américain et Européen ce qui met à l’écart l’affirmation du gouvernement. Les résultats de la comparaison bivariée des marchés montrent que le marché Russe émet un niveau élevé des chocs en affectant la structure de corrélation entre la Russie et les marchés étrangers tandis que l’inverse est vrai dans le cas des retombées de la volatilité. Il est conclu que les gouvernements ne devraient pas utiliser la justification des chocs étrangers qui affectent les marchés locaux pendant la crise globale. Comme dans l’analyse précédente, nous examinons la transmission des chocs et de la volatilité sur les marchés des sociétés d’investissements immobiliers cotées (SIIC). Etant donné que la loi exige des SIIC de consacrer une grande partie de leurs investissements dans les actifs immobiliers, le rôle des SIIC dans la propagation de la crise hypothécaire des subprimes à travers le globe a été évalué. L’analyse préliminaire démontre que pendant la crise tous les marchés possèdent entre eux des liens de causalité dans le sens de Granger. Ce résultat est en accord avec le point de vue largement répandu que les marchés boursiers se comportent de la même manière pendant la crise globale. Ensuite l’intégration entre les SIIC américaines (USREITs) et les SIIC globales et le S&P500 a été examiné. Les résultats indiquent que les SIIC américaines sont faiblement intégrées avec les SIIC globales impliquant un niveau faible des retombées bidirectionnelles du choc et de la volatilité tandis que l’inverse est vrai dans le cas des SIIC américaines (USREITs) - S&P500. Enfin, l’intégration entre le S&P500 et les SIIC globales a été exploré. Les résultats suggèrent une faible intégration entre le S&P500 et les SIIC globales. Les chocs sont essentiellement transmis du S&P500 vers les SIIC globales. D’une manière générale, l’étude amène à la conclusion que ni les SIIC américaines ni le S&P500 ne peuvent pas créer une panique plus grande sur les marchés des SIIC globales pendant la crise. Ces liens faibles indiquent également les avantages de la diversification d’un portefeuille.En étudiant la crise au niveau suivant, nous analysons la relation à court ainsi qu’à long terme entre le prix du pétrole brut et les marchés boursiers pour le Brésil, la Russie, l’Inde et la Chine (BRIC) dans le cadre des modèles structurels contraints. Nos conclusions indiquent que les marchés boursiers du BRIC suivent dans certaine mesure l’hypothèse de l’efficience des marchés comme dans le cas d’un pays importateur du pétrole un choc positif de prix du pétrole entraîne une chute du marché boursier et l’inverse est vrai pour tous les pays exportateurs du pétrole. Les deux comportements importants ont été identifiés qui sont liés au taux d’intérêt à court terme et à la production industrielle. La montée des prix du pétrole engendre l’inflation qui est enrayée par une hausse du taux d’intérêt à court terme. En même temps, la production industrielle a tendance à s’accroître en termes réels au lieu de diminuer vu le choc des prix du pétrole (une hausse des prix du pétrole). Ce résultat peut être imputé à la couverture du risque d’une hausse des prix du pétrole avec la livraison physique. Dès que le contrat de couverture commence à expirer après 30, 90 ou 180 jours l’impact des prix du pétrole commence à réduire la production industrielle. Le deuxième objectif de la thèse est d’étudier l’intervention gouvernementale particulièrement sur les marchés boursiers et dans l’économie en général. D’un point de vue boursier, nous analysons le cas de l’intervention répétée du gouvernement Russe sur ses marchés boursiers nationaux pendant la fin d’année 2008. En utilisant la méthodologie des études d’événements, les résultats sont peu concluants sur l’efficacité de l’intervention gouvernementale pour protéger le marché boursier contre des chocs financiers extérieurs. Ainsi l’étude préconise aux gouvernements de ne pas intervenir pendant la crise des marchés boursiers.En étudiant le cas de l’économie en général, une nouvelle idée a été développée et lancée concernant l’intervention de la banque centrale pour contrecarrer une Bulle des Prix des Actifs (BPA). Nous avons détecté différents problèmes dans la théorie économique concernant l’intervention de la banque centrale sur le marché monétaire en cas d’apparition d’une BPA comme par exemple, - un décalage dans le temps ne peut pas avoir une incidence sur le secteur formant une bulle spéculative tout seul ainsi que l’inadéquation des canaux traditionnels des prêts bancaires. Pour faire face à ces problèmes l’étude fait avancer l’idée d’une intervention réglementaire basée sur certaines suppositions classiques. L’idée implique que contrairement à l’intervention traditionnelle de la politique monétaire la banque centrale devrait imposer aux institutions de crédit des limites d’exposition au risque de crédit pour chaque secteur. Ces limites devraient être imposées une fois que la banque centrale découvre une hausse anormale des prix dans un secteur économique donné. Nos résultats préliminaires suggèrent que l’idée d’une intervention réglementaire a du potentiel de contrecarrer la BPA. / The objective of the dissertation is to study various aspects of financial crisis 2007-09. Overall there are two kinds of objectives that are pursued in this dissertation: the first objective is to decipher the linkages between different stock markets, real estate markets and oil markets in order to assess the return and volatility spillover effects. The focus in this area is on the level of integration among the markets during different periods of time including crisis. This area is investigated through developing three separate essays. The first essay tests the Russian government claim that shocks originating in foreign markets were primarily responsible for its stock market panic during September-October 2008. Using financial contagion framework, the results indicate that the Russian stock market is weakly integrated with the US and European market in turn discarding the government claim. In bivariate market comparison, the results indicate that Russian market emits high level of shocks affecting the correlation structure between Russia and foreign markets while the reverse is true in case of volatility spillover effects. It is concluded that the governments should not use the justification of foreign shocks affecting the local markets during global crisis. Akin to foregoing analysis, we look at the transmission of shock and volatility in the Real Estate Investment Trust (REIT) markets. Since by law REITs are required to invest a large portion of their investments in real estate, the role of REITs in spreading the subprime mortgage crisis across the globe has been assessed. The initial analysis indicates that during crisis all markets are granger causing each other. The result is in compliance with the widely held view that the stock markets behave alike during global crisis. Next the integration between USREITs and global REITs and S&P500 has been examined. The results indicate USREITs is weakly integrated with the global REITs implying low level of bidirectional shock and volatility spillover while the reverse is true in case of USREITs- S&P500. Finally the integration between S&P500 and global REITs has been explored. The results suggest weak integration between S&P500 and global REITs. The shocks are mainly transmitted from S&P500 to global REITs. Over all the study concludes that neither USREITs nor S&P500 can create a wider panic in the global REIT markets during crisis. These weak linkages points towards portfolio diversification benefits as well.Studying the crisis at the next level, we analyze short-run as well as long-run relationship between crude oil price and stock markets for Brazil, Russia, India and China (BRIC) within a constrained structural modeling framework. Our findings indicate that BRIC stock markets to certain extent follow the efficient market hypothesis such that in case of oil importing country a positive oil price shock cause the stock market to fall and the reverse is true for an oil exporting country. Two important behaviors have been identified related to short-run interest rate and industrial production. The rise in oil prices generate inflation which is countered by increase in short-run interest rate. At the same time, industrial production tends to increase in real terms instead of decreasing in view of oil price shock (increase in oil price). The result can be attributed to hedging oil price risk with physical delivery. Once the hedge contract starts expiring after 30, 90 or 180 days the impact of oil price starts reducing the industrial production. The second objective of the dissertation is to study the government intervention specifically in the stock markets and generally in the economy. From stock market perspective, we analyze the case of Russian government repeated intervention in its national stock markets during late 2008. Using event-study methodology the findings indicate weak evidence that government intervention can in fact prevent stock market from external financial shocks. The study strongly recommends that the governments should not intervene during stock market crisis.Studying the case of general economy, a new idea has been developed and floated regarding central bank’s intervention directed to preempt an Asset Price Bubble (APB). The economic theory regarding central bank monetary policy intervention has been found to suffer from various problems in the event an APB occurs, such as, -time lag, -cannot affect bubbled sector alone as well as –irrelevance of traditional bank-lending channel. To deal with these issues the study brings forward the idea of regulatory intervention based on certain text book assumptions. The idea entails that contrary to traditional monetary policy intervention, the central bank should impose credit exposure limits for a particular sector on credit institutions. These limits should be imposed once the central bank finds out the abnormal increase in prices in a given sector of the economy. Our preliminary findings suggest that idea of regulatory intervention has the potential to preempt the APB.

[Truncated abstract] Given the theoretical and historical evidence that support the benefit of investing internationally. there is Iittle knowledge available of proper international portfolio construction in terms of how much should be invested in foreign countries, which countries should be targeted, and types of assets to be included in the portfolio. The prospects of these benefits depend on the market volatilities, cross-country correlations, and currency risks to change in the future. Another important issue in international portfolio diversification is the growth of newly emerging markets which have different characteristics from the developed ones. Addressing the issues, the thesis intends to investigate the nature of volatility, conditional correlations, and the impact of currency risks in international portfolio, both in developed and emerging markets. Chapter 2 provides literature review on volatility spillovers, conditional correlations, and forecasting both VaR and conditional correlations using GARCH-type models. Attention is made on the estimated models, type of assets, regions of markets, and tests of forecasts. Chapter 3 investigates the nature of volatility spillovers across intemational assets, which is important in determining the nature of portfolio's volatility when most assets are seems to be connected. ... The impacts of incorporating volatility spillovers and asymmetric effect on the forecast performance of conditional correlation will also be examined in this thesis. The VARMA-AGARCH of McAleer, Hoti and Chan (2008) and the VARMA-GARCH model of Ling and McAleer (2003) will be estimated to accommodate volatility spillovers and asymmetric effect. The CCC model of Bollerslev (1990) will also be estimated as benchmark as the model does not incorporate both volatility spillovers and asymmetric effects. Given the information about the nature of conditional correlations resulted from the forecasts using a rolling window technique, Section 2 of Chapter 4 investigates the nature of conditional correlations by estimating two multivariate GARCH models allowing for time-varying conditional correlations, namely the DCC model of Engle (2002) and the GARCC model of McAleer et al. (2008). Chapter 5 conducts VaR forecast considering the important role of VaR as a standard tool for risk management. Especially, the chapter investigates whether volatility spillovers and time-varying conditional correlations discussed in the previous two chapters are of helps in providing better VaR forecasts. The BEKK model of Engle and Kroner (1995) and the DCC model of Engle (2002) will be estimated to incorporate volatility spillovers and conditional correlations, respectively. The DVEC model of Bollerslev et al. (1998) and the CCC model of Bollerslev (1990) will be estimated to serve benchmarks, as both models do not incorporate both volatility spillovers and timevarying conditional correlations. Chapter 6 concludes the thesis and lists somc possible future research.

This dissertation studies the cost of carry relationship and the international dynamics of mispricing, price and volatility in the three Nikkei futures markets - the Osaka Exchange (OSE), the Singapore Exchange (SGX) and the Chicago Mercantile Exchange (CME). Previous research does not fully consider the unique characteristics of the triple-listed Nikkei futures contracts, or the price and volatility dynamics in the three Nikkei futures exchanges at the same time. This dissertation makes a significant contribution to the existing literature. In particular, with a comprehensive new 19-year sample period, this dissertation helps deepen the understanding of the Nikkei spot-futures equilibrium and arbitrage behaviour, cross-border information transmission mechanism, and futures market integration. The first topic of the dissertation is to study the cost of carry relationship, mispricing and index arbitrage in the three Nikkei markets. The standard cost of carry model is adjusted for each Nikkei futures contract by allowing for the triple-listing nature and key institutional differences. Based on this, the economic significance of the Nikkei mispricing is explored in the presence of transaction costs. The static behaviour of the mispricing suggests that it is difficult especially for institutional investors to make arbitrage profits in the OSE and SGX, and that index arbitrage in the CME is not strictly risk-free due to the exchange rate effect. Smooth transition models are used to study the dynamic behaviour of the mispricing in the three markets. The results show that mean reversion in mispricing and limits to arbitrage are driven more by transaction costs than by heterogeneous arbitrageurs in the Nikkei markets. The second topic of the dissertation is to investigate the price discovery process in individual Nikkei markets and across the Nikkei futures markets. With smooth transition error correction models, this dissertation reports the leading role of the futures prices in the pre-crisis period and the leading role of the spot prices in the post-crisis period, in the first-moment information transmission process. Moreover, there is evidence of asymmetric adjustments in the Nikkei prices and volatilities. The cross-border dynamics suggest that the foreign Nikkei markets (the CME and SGX) act as the main price discovery vehicle, which implies the key functions of the equivalent, offshore markets in futures market globalisation. The third topic of the dissertation is to study the volatility transmission process in individual Nikkei markets and across the Nikkei futures markets, from the perspectives of the volatility interactions in and across the Nikkei markets and of the dynamic Nikkei market linkages. This dissertation finds bidirectional volatility spillover effects between the Nikkei spot and futures markets, and the information leadership of the foreign Nikkei markets (the CME and SGX) in the second-moment information transmission process across the border. It further examines the dynamic conditional correlations between the Nikkei markets. The results point to a dramatic integration process with strongly persistent and stable Nikkei market co-movements over time.

This paper considers the linkages between output growth and output volatility for the sample of G7 countries over the period 1958M2-2011M7, thereby paying particular attention to spillovers within and between countries. Using the VAR-based spillover index approach by Diebold and Yilmaz (2012), we identify several empirical regularities: i) output growth and volatility are highly intertwined, with spillovers taking place into all four directions; ii) the importance of spillovers has increased after the mid 1980s and reached unprecedented levels during the recent financial and economic crisis; iii) the US has been the largest transmitter of output and volatility shocks to other countries. Generalized impulse response analyses point to moderate growth-growth spillovers and sizable volatility-volatility spillovers across countries, suggesting that volatility shocks quintuplicate in the long run. The cross-variable effects turn out negative: volatilty shocks lead to lower economic growth, growth shocks tend to reduce output volatility. Our findings underline the increased vulnerability of the G7 countries to destabilizing shocks and their detrimental effects on economic growth, which are sizeably amplified through international spillover effects and the associated repercussions. / Series: Department of Economics Working Paper Series