Title
Mean and volatility Spill Over Between the Stock, Gold and Oil Markets During US Financial Crisis and Chinese Stock market Crash
This study aims to examine the return and volatility spillover between different markets (Stock, Oil, and Gold) during full sample period, US financial crisis and Chinese stock market crash. Moreover, it calculates the optimal weights and hedge ratios for different portfolios during US financial crisis and Chinese stock market crash. It uses a sample period from January 2000 to June 2018. It uses a VARAGARCH model for the estimation of return and volatility spillover, which is proposed by McAleer et al. (2009). Following are the empirical findings of the study
This study finds a return transmission from USA to Asian stock markets during US financial crises, whereas no return spillover is found from China to Asian stock markets during Chinese stock market crash. Moreover, volatility effect is not transmitted from US to Asian stock markets during US financial crisis, whereas volatility transmits from China to four Asian stock markets (India, Indonesia, Taiwan and Thailand) during Chinese stock market crash. It implies that US and China stock markets do not transmit risk to majority emerging Asian stock markets during crisis period.
It finds that return and volatility spillovers are not found to be significant from USA to majority Latin American markets during US financial crisis. It implies that international portfolio investors can diversify their portfolio by investing in US and Latin American stock markets. During Chinese stock market crash, return and volatility are also not transmitted from the China to Latin American stock markets. It implies that diversification benefits can increased by investing in a portfolio of Chinese and Latin American stock markets during Chinese stock market crash.
The return spillover is significant, whereas volatility transmission is insignificant from oil to majority Asian stock markets during US financial crisis. Moreover, the return spillover is significant, whereas volatility spillover is insignificant from oil to most of the Asian stock markets during Chinese stock market crash. Overall, the risk of few emerging Asian markets sensitive to the international oil prices during both crisis. It implies that the return and risk of few emerging Asian stocks are sensitive to international oil prices during US crisis. Moreover, diversification opportunities are higher between oil and Asian stocks during Chinese crash.
The return and volatility transmission is insignificant from the oil to most of the Latin American stock markets during US financial crisis. However, only Brazil stock market is sensitive to the international oil markets during US financial crisis. Moreover, the return and volatility transmission is insignificant from the oil to Latin American stock markets during Chinese stock market crash. It suggests that investors can minimize risks by investing in a portfolio of oil and Latin American stock markets during crisis periods.
The return spillover from gold to majority Asian markets is insignificant during US financial crisis. Moreover, volatility spillover is evident from gold to three Asian markets (Indonesia, Malaysia and Taiwan)during US financial crisis. Moreover, the return spillover is significant from gold to four Asian stock markets (China, India, Pakistan and Thailand) during Chinese stock market crash. In addition, volatility is only transmitted from gold to few Asian stock markets (China, Korea, and Malaysia) during Chinese stock market crash. Overall, few Asian stock markets receive the risk from gold market during crisis. It suggests that investors can get benefit of diversification by investing in portfolio of gold and majority Asian stock markets during US financial crisis and Chinese stock market crash.
This study finds an insignificant return and volatility spillover from US to Latin American stock markets during US financial crisis. Thus, addition of gold in portfolio of Latin American stocks will reduce the risk of portfolio during US financial crisis. Moreover, the return and volatility transmission is also insignificant from gold to Latin American stock markets (except Mexico) during Chinese stock market crash. It suggest that diversification opportunities are higher in portfolio of gold and majority Latin American stock markets during crisis.
Overall, the volatility spillover results vary during crisis periods, thus portfolio investors needs to adjust their portfolios during crisis period to diversify risk. Therefore, this study estimates the optimal weights and hedge ratios to get maximum benefit of diversification during full sample, US financial crisis, and Chinese stock market crash. The optimal portfolio analysis suggests that investors should increase their asset allocation for Asian stocks in Asia-USA portfolio during US financial crisis. Moreover, investors should decrease their asset allocation in Chinese stocks during Chinese stock markets crash.
For LA-USA portfolio, investors should increase investment in Latin American stock markets during US financial crisis. For LA-China portfolio, investors should decrease their investment in Latin American stocks during Chinese stock market crash. Moreover, investors should increase their asset allocation for most of Asian stocks in Asia-oil portfolio during US financial crisis. For Asia-oil portfolio, investors should also increased the asset allocation for Asian stocks during Chinese stock market crash. Investors should increase their investment in Brazil and Chile stocks for the Brazil-OIL and Chile-OIL portfolios during US financial crisis. For LA-oil portfolio, investors should increase their investment in Latin American stock markets during Chinese stock market crash as compared to the full sample.
These results are helpful in asset allocation decisions of individual and institutional portfolio investors in the world, especially during crisis (originated from US and Chinese markets). These findings are also useful for policymakers of emerging Asian and Latin American economies, especially on how policy makers deal with higher interconnectedness between the stocks, oil-stocks and gold-stock markets during crisis period. The findings of volatility spillover between different financial markets would be of greater interest for policymakers to stabilize the economy and financial markets during different crises. Therefore, policymakers need to design such policies that would safeguard the financial sector from international financial shocks from US and China. They can also predict the impact of financial crises from other markets on their own markets with the help of spillovers between financial markets.