An Empirical Analysis of the Volatility Spillover Effect between World-Leading and the Asian Stock Markets Implications for Portfolio Management

摘要

This study employs the Vector Autoregressive-Generalized Autoregressive ConditionalHeteroskedasticity (VAR-AGARCH) model to examine both return and volatility spillovers from theUSA (developed) and China (Emerging) towards eight emerging Asian stock markets during thefull sample period, the US financial crisis, and the Chinese Stock market crash. We also calculate theoptimal weights and hedge ratios for the stock portfolios. Our results reveal that both return andvolatilitytransmissionsvaryacrossthepairsofstockmarketsandthefinancialcrises. Morespecifically,return spillover was observed from the US and China to the Asian stock markets during the USfinancial crisis and the Chinese stock market crash, and the volatility was transmitted from the USA tothe majority of the Asian stock markets during the Chinese stock market crash. Additionally, volatilitywas transmitted from China to the majority of the Asian stock markets during the US financial crisis.The weights of American stocks in the Asia-US portfolios were found to be higher during the Chinesestock market crash than in the US financial crisis. For the majority of the Asia-China portfolios,the optimal weights of the Chinese stocks were almost equal during the Chinese stock market crashandthe USfinancialcrisis. Regardinghedge ratios, fewerUS stockswererequired tominimize theriskfor Asian stock investors during the US financial crisis. In contrast, fewer Chinese stocks were neededto minimize the risk for Asian stock investors during the Chinese stock market crash. This studyprovidesusefulinformationtoinstitutionalinvestors,portfoliomanagers,andpolicymakersregardingoptimal asset allocation and risk management.