Volatility spillover and time varying conditional correlation between stock and bond returns: Evidence from the MINT economies
Emenike, Stanley Ugochukwu (2017)
Pro gradu -tutkielma
Emenike, Stanley Ugochukwu
2017
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe201705226704
https://urn.fi/URN:NBN:fi-fe201705226704
Tiivistelmä
One way to reduce investment risk is to diversify portfolio by investing in different asset classes or similar asset class in different market. It is paramount that volatility and correlation dynamics in financial market is assessed by investors in order to make informed decision and minimize risk. The aim of the thesis is to assess the stock-bond volatility spillover and correlation dynamics of emerging market such as the MINT economies. The research would contribute to existing studies on the volatility and correlation dynamics in the context of emerging markets such as MINT since most previous studies has been carried out on developed market with limited studies on emerging markets. This study is one of the few studies focusing directly on emerging markets and thus provides valuable insights into their functioning in terms of volatility and correlation dynamics. The general idea is to ascertain the volatility transmission, nature of conditional correlation and the existence of asymmetries in the conditional variance, covariance and correlation between both asset returns.
The analysis is approached using econometric models such as the BEKK GARCH, CCC GARCH, DCC GARCH and ADCC GARCH in modelling the phenomenon. The findings reveal that stock-bond return and volatility spillover exist among MINT economies albeit the volatility transmission is unidirectional. Also, evidence shows stock-bond conditional correlation is time varying and asymmetric effects exist among MINT economies whereby Mexico and Indonesian stock returns are more sensitive to negative shock than bond returns in full period while Nigerian and Turkish bond returns are more sensitive to negative shock than stock returns for both data period. The results provide insights for potential investors and portfolio managers on the potential benefits of investing in emerging market especially the MINT economies by portfolio diversification.
The analysis is approached using econometric models such as the BEKK GARCH, CCC GARCH, DCC GARCH and ADCC GARCH in modelling the phenomenon. The findings reveal that stock-bond return and volatility spillover exist among MINT economies albeit the volatility transmission is unidirectional. Also, evidence shows stock-bond conditional correlation is time varying and asymmetric effects exist among MINT economies whereby Mexico and Indonesian stock returns are more sensitive to negative shock than bond returns in full period while Nigerian and Turkish bond returns are more sensitive to negative shock than stock returns for both data period. The results provide insights for potential investors and portfolio managers on the potential benefits of investing in emerging market especially the MINT economies by portfolio diversification.