Return and volatility connectedness across stock markets: A global perspective

ABSTRACT

The connectedness of stock markets is inevitable because of the rapid increases in global financialisation, financial liberalisation, and integration of national economies. This study therefore increases the number of stock markets included in the LASSO-VAR model to separately estimate the connectedness of the daily-frequency market returns and volatility of a sample comprising 50 selected stock markets between 2011 and 2021. We observe that the total connectedness index changes substantially over time, exhibiting the highest change during market turbulences, i.e., the beginning of COVID-19. We also show that the transmission of shocks originates from most European markets and then impacting Asian–Pacific markets, although their intensities exhibit significant time variations. Finally, we find that macroeconomic news and uncertainties are drivers of total connectedness, while directional total connectedness is mainly driven by global rather than domestic factors.

KEYWORDS:

• stock market linkages
• volatility connectedness
• return spillover
• COVID-19 pandemic
• LASSO–VAR model

JEL CODES:

• G15
• G32
• C53
• F65

Notes

1 In this study, the terms connectedness, integration, contagion, and spillover express the same meaning. They are used interchangeably.

2 The stock markets are Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Croatia, Czech, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong (China), Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Latvia, Luxembourg, Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Philippines, Poland, Portugal, Russia, Saudi Arabia, Spain, Singapore, Sweden, Switzerland, Taiwan (China), Thailand, Turkey, UK, United Arab Emirates, US, Vietnam, and Venezuela.

3 LASSO: Least Absolute Shrinkage and Selection Operator.

4 For a detailed discussion on this equation, refer to the work of Baruník and Křehlík (2018), among others.

5 Table A3 in the Appendix presents the summary statistics of these indicator.

6 We also investigated the effects of one lag of an interesting variable, ${\mathrm{X}}_{t-1,i}$, in the daily regression, confirming that it did not change the outcome of the analysis.