Cross-Stock Market Spillovers Through Variance Risk Premiums and Equity Flows

60 Pages Posted: 14 Feb 2018

See all articles by Masazumi Hattori

Masazumi Hattori

Hitotsubashi University

Ilhyock Shim

Bank for International Settlements (BIS)

Yoshi Sugihara

Bank of Japan

Date Written: February 2018

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.

Keywords: cross-stock market correlation, emerging market economy, equity fund flow, variance risk premium

JEL Classification: F32, G12, G15, G23

Suggested Citation

Hattori, Masazumi and Shim, Ilhyock and Sugihara, Yoshi, Cross-Stock Market Spillovers Through Variance Risk Premiums and Equity Flows (February 2018). BIS Working Paper No. 702, Available at SSRN: https://ssrn.com/abstract=3123289

Masazumi Hattori (Contact Author)

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Ilhyock Shim

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

Yoshi Sugihara

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

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