STOCK MARKET AND VOLATILITY SPILLOVER: EVIDENCE FROM VAR-GARCH ANALYSIS OF BRICS AND THE US
Subedi, Rajan (2018)
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The thesis paper aims to investigate the volatility spillover effects from the stock market of the United States to BRICS (Brazil, Russia, India, China and South Africa). In this study, I have employed VAR-GARCH framework on weekly return MSCI (Morgan Stanley Capital International) index of respective stock markets to analyze the volatility transmission mechanism between stock market of the US and BRICS. The data sample is divided into one full period from January 2000 to December 2016 and three different sub-periods as pre-crisis period, financial crisis period and post-crisis period. The result of VAR (1) - GARCH (1, 1) model employed to examine the volatility spillover between the US and the BRICS markets shows that most of the BRICS nations are affected during the global financial crisis period rather than the normal period. The result indicates that the presence of shocks transmission and volatility spillover during the global financial crisis 2007-09 is significant compared to the normal period. The result suggests that volatility spillover between the US and Brazil is high as compared to rest of the BRICS nations. The market of Russia, South Africa and China are affected relatively less than Brazil by volatility of the US market in the normal period. The presence of minimal impact suggests that most of the BRICS stock market behaves independently during the normal period. Moreover, the result shows that Russia is the most independent market followed by China during normal period despite of being affected by the US during the financial crisis. The findings also reveal that all BRICS market has significant effects of own-lagged past return innovations (shocks) and past conditional volatilities on their current volatilities. In addition, the evidence of short term influence of South Africa on the US can be used for further study on stock market interdependence of both markets. Furthermore, my study on stock market volatility during the normal period as well as financial turmoil period provides useful information to researchers, financial market regulators as well as investors to know the behavior of emerging stock markets.