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Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market?

Author

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  • Barunik, Jozef
  • Kočenda, Evžen
  • Vácha, Lukáš
Abstract
Asymmetries in volatility spillovers are highly relevant to risk valuation and portfolio diversification strategies in financial markets. Yet, the large literature studying information transmission mechanisms ignores the fact that bad and good volatility may spill over at different magnitudes. This paper fills this gap with two contributions. One, we suggest how to quantify asymmetries in volatility spillovers due to bad and good volatility. Two, using high frequency data covering most liquid U.S. stocks in seven sectors, we provide ample evidence of the asymmetric connectedness of stocks. We universally reject the hypothesis of symmetric connectedness at the disaggregate level but in contrast, we document the symmetric transmission of information in an aggregated portfolio. We show that bad and good volatility is transmitted at different magnitudes in different sectors, and the asymmetries sizably change over time. While negative spillovers are often of substantial magnitudes, they do not strictly dominate positive spillovers. We find that the overall intra-market connectedness of U.S. stocks increased substantially with the increased uncertainty of stock market participants during the financial crisis.

Suggested Citation

  • Barunik, Jozef & Kočenda, Evžen & Vácha, Lukáš, 2014. "Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market?," FinMaP-Working Papers 13, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    • Handle: RePEc:zbw:fmpwps:13
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    References listed on IDEAS

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    More about this item

    Keywords

    volatility; spillovers; semivariance; asymmetric effects; financial markets;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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