Interlinkages Between Equity, Currency, Precious Metals and Oil Markets: An Emphasis on Emerging Markets

This thesis examines the interlinkages between equity, currency, precious metals and oil markets. The study follows an international approach with a special focus on emerging markets in Europe, Asia and Latin America, but without forgetting the importance of the G-7 that represents the most developed markets. The present research also focuses on the existence of interlinkages between these markets and the currency, oil, and precious metals markets. The author of this thesis considered it appropriate to implement such an analysis due to the fact that the relationships between financial markets, currency markets and the above-mentioned commodities markets have not been analyzed to the extent that it is proposed in the present thesis. Using daily data, the study focuses on the investigation of the relationships that exist between these financial and commodity markets for a time period that spans from 1995 to 2008; different time periods and sub-samples are also analysed, in order to obtain an in-depth understanding of the interlinkages between these markets. Both the long-run and the short-run association between these variables are investigated. In doing this, techniques like the Engle and Granger two step, and Johansen cointegration techniques, Vector Error Correction Modelling and Granger causality tests are employed with the main objective of examining the relationship between these financial variables. The study also employs bivariate and trivariate econometric techniques in order to provide sufficient evidence regarding the interlinkages between these markets. As a consequence, the existing evidence is updated and extended by investigating the nature of volatility spillovers between these markets; thus, the sample period is divided into a number of sub periods to analyse the behaviour of these variables before and after the introduction of the Euro, and also before and after the Asian Crisis using GARCH and EGARCH modelling. The main findings show that exchange rates and stock prices seem to be independent. Overall, there is no evidence of these two variables moving together either in the long-run or short-run. The results show evidence of a unidirectional causality relationship running from stock returns to exchange rates in some of the countries under analysis, with weak evidence of a causal relationship running from exchange rates to stock returns. In relation to the volatility analysis, there is some commonality regarding the behaviour of the variables, with a unidirectional spillover effect between the markets, which is found from the stock returns equation to the exchange rates equation. The lack of significant spillovers from exchange rate changes to stock returns found here for some countries across a number of exchange rates is consistent with existing research in this area. The analysis of precious metals markets shows that they do not seem to be strongly affected by movements in equity markets; on the other hand, oil prices tend to be positively correlated with precious metals markets, the latter having an important influence on them

Spillover effects from London and Frankfurt to Central and Eastern European stock markets

This paper investigates comovement in stock markets between the emerging economies of Central and Eastern Europe (CEE) and the developed markets of Western Europe. Three approaches are employed to examine this issue. The first two approaches, time-varying realised correlation ratios and cointegration statistics, use a two-step technique to derive timevarying estimates of the comovement between returns on CEE and EU stock exchanges. The first step uses common factor analysis to define the factors driving CEE stock exchanges, while the second step evaluates the relationship between the leading principal factor for CEE countries and the DAX and FTSE using time-varying realised correlation and rolling cointegration statistics. The third approach employs multivariate GARCH techniques to obtain estimates of mean and variance spillover effects

Cointegration and conditional correlations among German and Eastern Europe equity markets

This paper aims to examine the long term relationship between German and three Central and Eastern Europe (CEE) equity markets. Application of Johansen as well as Engle-Granger cointegration tests show that there is no long-term relationship among these markets while the Gregory-Hansen cointegration test rejects the null hypothesis of no cointegration with structural break. An additional objective is to capture the time-varying correlation among these markets through the dynamic conditional correlation models. Empirical results suggest that correlations increased after the accession of the CEE countries into the European Union.Equity markets; Cointegration; Dynamic conditional correlation models.

Size and liquidity effects in Nigeria: an industrial sector study

This study estimates liquidity premiums using the recently developed Liu (2006) measure within a multifactor capital asset pricing model (CAPM) including size premiums and a time varying parameter model for the West African emerging market of Nigeria. The evidence suggests that liquidity factors are relevant only for financial and basic materials sector stocks while size factor is more generally relevant in explaining the cross section of stock returns in the Nigerian domestic equity market. Costs of equity estimates are high further underlining the limitations of this market as a capital-raising venue in contrast to the dominant banking sector

Sources of time varying return comovements during different economic regimes: evidence from the emerging Indian equity market

We study the economic and non-economic sources of stock return comovements of the emerging Indian equity market and the developed equity markets of the US, UK, Germany, France, Canada and Japan. Our findings show that the probability of extreme comovements in the economic contraction regime is relatively higher than in the economic expansion regime. We show that international interest rates, inflation uncertainty and dividend yields are the main drivers of the asymmetric return comovements. Findings reported in the paper imply that the impact of interest rates and inflation on return comovements could be used for anticipating financial contagion and/or spillover effects. This is particularly critical since during extreme market conditions, the tail return comovements can potentially reveal critical information for active portfolio management

Analysing correlation between the MSE index and global stock markets

The paper investigates the time-varying correlation between the Malta Stock Exchange (MSE) index, and five major international stock markets. An MGARCH-DCC approach is employed to measure the degree to which the MSE moves with other stock markets. Daily returns on these six stock exchange indices were computed and used to calculate dynamic conditional correlations (DCCs) between the markets. The results indicate that the local stock market appears not to be driven by the same forces that shape foreign stock markets, implying that local dynamics shape returns on the Exchange, rather than foreign events.peer-reviewe

Volatility Spillover in India, USA and Japan Investigation of Recession Effects

In the past decades, there has been an unprecedented increase in cross border transactions between countries in terms of goods and financial flows. This integration has been fuelled by search of lower risk investments, risk diversification, search for cost effective and more efficient factors of production and dreams of global dominance in the world wide market place. An important result of these capital flows was its impact on linkages of global asset returns and spillover of volatility from one capital market to another. This study aims to understand the spillover effect between the US, the Japan capital markets and Indian equity index (Sensex). We analyze whether the volatility spillover is contemporaneous (directly in the very same day), or dynamic/lagged (with one day lag). A GARCH (1,1) model of modelling volatility has been undertaken for this purpose. This paper concludes that contemporary volatility of the Japan capital markets influenced Sensex in the pre-recession period but in the post recession there was no significant contemporaneous spillover from USA and Japan capital markets to Sensex. However, US became a significant factor while considering dynamic spillover in the post recession era. Also, there was no bidirectional volatility spillover from India to US. But, the study showed evidence of dynamic volatility spillover from Indian market to Japanese Capital market

Stock market integration between three CEECs, Russia and the UK

This paper estimates a tri-variate VAR-GARCH(1,1)-in-mean model to examine linkages between the stock markets of three Central and Eastern European countries (CEECs), specifically the Czech Republic, Hungary, and Poland, and both the UK and Russia. The adopted framework allows to analyse interdependence by estimating volatility spillovers, and also contagion by testing for possible shifts in the transmission of volatility following the introduction of the euro and EU accession. Further evidence on possible changes in the transmission mechanism (namely, on whether there is contagion) can be obtained by examining the conditional correlations implied by the estimated model over different time periods. The empirical findings suggest that there is significant co-movement (interdependence) of these CEEC markets with both the Russian and the UK ones. Furthermore, whilst the introduction of the euro has had mixed effects, EU accession has resulted in an increase in volatility spillovers between the three CEECs considered and the UK (contagion)

Dynamic Returns Linkages and Volatility Transmission between South African and World Major Stock Markets

This paper analyses returns and volatility linkages between the South African (SA) equity market and the world major equity markets using daily data for the period 199-2007. Also analysed is the nature of volatility, the long term trend of volatility and the risk-premium hypothesis. The univariate GARCH and multivariate Vector Autoregressive models are used. Results show that both returns and volatility linkages exist between the SA and the major world stock markets, with Australia, China and the US showing most influence on SA returns and volatility. Volatility was found to be inherently asymmetric but reasonably stable over time in all the stock markets studied, and no significant evidence was found in support of the risk-premium hypothesis.Reruns and volatility linkages; exponential GARCH; GARCH-in-mean; Vector Autoregressive; Portfolio DiversiÂ…cation; Financial Stability