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Cross-stock market spillovers through variance risk premiums and equity flows

Author

Listed:
  • Hattori, Masazumi
  • Shim, Ilhyock
  • Sugihara, Yoshihiko
Abstract
We estimate variance risk premiums (VRPs) in the stock markets of major advanced economies (AEs) and emerging market economies (EMEs) over 2007–15 and decompose the VRP into variance-diffusive risk premium (DRP) and variance-jump risk premium (JRP). Daily VAR analysis reveals significant spillovers from the VRPs of the United States and eurozone’s AEs to the VRPs of other economic areas, especially during the post-Global Financial Crisis (GFC) period. We also find that during the post-GFC period, shocks to the DRPs of the United States and the eurozone’s AEs have relatively strong and long-lived positive effects on the VRPs of other economic areas whereas shocks to their JRPs have relatively weak and short-lived positive effects. In addition, we show that increases in the size of US VRP, DRP and JRP tend to significantly reduce weekly equity fund flows to all other AEs and some EMEs during the post-GFC period. Finally, US DRP plays a more important role than US JRP in the determination of equity fund flows to all other AEs and some EMEs after the GFC, while the opposite holds true for equity fund flows to all other AEs during the GFC. Such results indicate the possibility of equity fund flows working as a channel of cross-market VRP spillovers.

Suggested Citation

  • Hattori, Masazumi & Shim, Ilhyock & Sugihara, Yoshihiko, 2018. "Cross-stock market spillovers through variance risk premiums and equity flows," CIS Discussion paper series 667, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:cisdps:667
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    References listed on IDEAS

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    Cited by:

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    3. Ni, Zhongxin & Wang, Linyu, 2023. "The predictability of skewness risk premium on stock returns: Evidence from Chinese market," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 576-594.
    4. Gong, Jue & Wang, Gang-Jin & Zhou, Yang & Zhu, You & Xie, Chi & Foglia, Matteo, 2023. "Spreading of cross-market volatility information: Evidence from multiplex network analysis of volatility spillovers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
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    6. Tongshuai Qiao & Liyan Han, 2023. "COVID‐19 and tail risk contagion across commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 242-272, February.

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    More about this item

    Keywords

    cross-stock market correlation; emerging market economy; equity fund flow; variance risk premium;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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