International Business Cycle Spillovers

We apply Diebold-Yilmaz spillover index methodology to monthly industrial production indices to study business cycle interdependence among G-6 industrialized countries since 1958. The business cycle spillover index fluctuates substantially over time, increasing especially after the 1973-75, 1981-82 and 2001 U.S. recessions. The band within which the spillover index fluctuates has widened since the start of the globalization process in the early 1990s. Our most important result, however, concerns the current state of the world economy: In a matter of four months from September to December 2008, the business cycle spillover index recorded the sharpest increase ever, reaching a record level as of December 2008 (See http://data.economicresearchforum.org/erf/bcspill.aspx?lang=en for updates of the spillover plot). Focusing on directional spillover measures, we show that in the current episode the shocks are mostly originating from the United States and spreading to other industrialized countries. We also show that, throughout the period of analysis, the U.S. (1980s and 2000s) and Japan (1970s and 2000s) have been the major transmitters of shocks among the industrialized countries.Business Cycles, Spillovers, Industrial Production, Vector Autoregression, Variance Decomposition, Unit Roots, Cointegration

Return and Volatility Spillovers among the East Asian Equity Markets

This article examines the extent of contagion and interdependence across the East Asian equity markets since early 1990s and compares the ongoing crisis with earlier episodes. Using the forecast error variance decomposition from a vector autoregression, we derive return and volatility spillover indices over the rolling sub-sample windows. We show that there is substantial difference between the behavior of the East Asian return and volatility spillover indices over time. While the return spillover index reveals increased integration among the East Asian equity markets, the volatility spillover index experiences significant bursts during major market crises, including the East Asian crisis. The fact that both return and volatility spillover indices reached their respective peaks during the current global financial crisis attests to the severity of the current episode.Stock returns, Volatility, Spillovers, Vector autoregression, Variance decomposition

Measuring financial asset return and volatilty spillovers, with application to global equity markets

We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of nineteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts

Measuring financial asset return and volatility spillovers : with application to global equity markets

We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of sixteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts. JEL Classification: F30, G15, F3

The Intertemporal Relation between Expected Return and Risk on Currency

The literature has so far focused on the risk-return tradeoff in equity markets and ignored alternative risky assets. This paper is the first to examine the presence and significance of an intertemporal relation between expected return and risk in the foreign exchange market. The paper provides new evidence on the intertemporal capital asset pricing model by using high-frequency intraday data on currency and by presenting significant time-variation in the risk aversion parameter. Five-minute returns on the spot exchange rates of the U.S. dollar vis-à-vis six major currencies (the Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar, and Canadian Dollar) are used to test the existence and significance of a daily risk-return tradeoff in the FX market based on the GARCH, realized, and range volatility estimators. The results indicate a positive, but statistically weak relation between risk and return on currency.Foreign exchange market, ICAPM, High-frequency data, Time-varying risk aversion, Daily realized volatility

Asymmetric Response to Monetary Policy Surprises at the Long-End of the Yield Curve

This paper provides a dynamic analysis of the responsiveness of asset markets to monetary policy path revisions. In an era of increased transparency and gradualism in policy making, one might expect an increased response to path revisions in asset markets as the policy actions become more predictable over longer horizons. Using federal funds futures contracts to extract near-term path revisions, we find that the responsiveness of Treasury securities to path revisions is significantly asymmetric, increasing during cycles of tightenings and declining during easings. This is consistent with the earlier literature that documents asymmetric effects of monetary policy on output.Asymmetric monetary policy; yield curve; federal funds futures

Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers

Using a generalized vector autoregressive framework in which forecast-error variance decompositions are invariant to variable ordering, we propose measures of both total and directional volatility spillovers. We use our methods to characterize daily volatility spillovers across U.S. stock, bond, foreign exchange and commodities markets, from January 1999 through September 2009. We show that despite significant volatility fluctuations in all four markets during the sample, cross-market volatility spillovers were quite limited until the global financial crisis that began in 2007. As the crisis intensified so too did the volatility spillovers, with particularly important spillovers from the bond market to other markets taking place after the collapse of Lehman Brothers in September 2008.Asset Market, Asset Return, Stock Market, Market Linkage, Financial Crisis, Contagion, Vector Autoregression, Variance Decomposition

On the network topology of variance decompositions: Measuring the connectedness of financial firms

The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008.Portfolio management ; Systemic risk ; Risk management

Volatility Connectedness of Bank Stocks Across the Atlantic

This paper presents an analysis of the dynamic measures of volatility connectedness of major bank stocks in the US and the EU member countries. The results show that in the early stages of the US financial crisis in 2007 and 2008, the direction of the volatility connectedness was from the US banks towards the EU banks. However, once the financial crisis became global in the last quarter of 2008, volatility connectedness became bi-directional. The surge in volatility connectedness from the EU banks to the US banks in June 2011 was unprecedented, reflecting the scale of deterioration in the state of the EU banks. Finally, the within-connectedness of the US banks fluctuated throughout our sample period, while the within-connectedness of the EU banks increased steadily since 2007, a reflection of the fact that the European debt and banking crisis has not ended yet

Is there persistence in the growth of manufactured exports? Evidence from newly industrializing countries

Price and income elasticities estimated from a country's export demand function are used both to predict and to prescribe effective export strategies. But the focus on elasticities has led to the neglect of an important empirical regularity: a strong persistencein the growth rate of a country's exports. The authors shift the spotlight to this phenomenon and describe the degree and pattern of persistence. They find that a country's exports are influenced not only by the elasticities, but also by the quality of its transactional infrastructure (proxied by the penetration of telecommunications). More important, when world income rises, exports rise relatively uniformly for different country groups. As world income contracts, the decline in exports is greater and is especially sharp for certain countries. The authors infer from this asymmetry in income elasticity of demand, and from the observed persistence of exports, that long-term buyer supplier relationships lead to the creation of"insiders"and"outsiders"in the world market for manufactured goods, a condition that tends to perpetuate itself.Access to Markets,Economic Theory&Research,Environmental Economics&Policies,Inequality,Markets and Market Access