Asymmetric Volatility Spillover and Risk Contagion During the COVID-19 Outbreak: Empirical Investigation from the Indonesian and Global Stock Markets

Noer Azam Achsani; Linda Karlina Sari; Ade Holis; Bayu Bandono; Gandhi Cahyo Wicaksono

doi:10.58915/aset.v4i2.2695

Authors

Noer Azam Achsani IPB University
Linda Karlina Sari IPB University
Ade Holis IPB University
Bayu Bandono OJK Institute – Indonesia Financial Services Authority (OJK)
Gandhi Cahyo Wicaksono OJK Institute – Indonesia Financial Services Authority (OJK)

DOI:

https://doi.org/10.58915/aset.v4i2.2695

Keywords:

Asymmetric spillover, Diebold-Yilmaz, COVID-19, Stock market, Volatility

Abstract

This paper shows evidence of a dramatic change in the structure and time-varying patterns of volatility connectedness between Indonesian and global stock market volatility during the COVID-19 outbreak. The Diebold-Yilmaz volatility spillover. The dynamic total connectedness across the stock market was moderate and relatively stable until early 2020. After that, the real connectedness spikes, and the direction of connectedness alters, which concurs with the COVID-19 outbreak. DJIA and EURO indices were the primary transmitters of shocks before the pandemic, whereas JKSE became the primary transmitter of shocks during the COVID-19 pandemic. Even though JKSE was a robust transmitter during the COVID-19 outbreak, the connection with DJIA warrants close and regular observation due to the very high spillover. The COVID-19 episode had immediate and unsettling impacts, which are essential for formulating policies to achieve financial stability. The findings are also very important not only for investors but also for policymakers.

References

[1] Fletcher, G., & Griffiths, M. Digital transformation during a lockdown. International Journal of Information Management, vol 55 (2020).

[2] Baek, S., Mohanty, S. K., & Glambosky, M. COVID-19 and stock market volatility: An industry-level analysis. Finance Research Letters, vol 37 (2020).

[3] Ashraf, B. N. Stock markets’ reaction to COVID-19: Cases or fatalities?. Research in International Business and Finance, vol 54 (2020).

[4] Kamaludin, K., Sundarasen, S., & Ibrahim, I. Covid-19, Dow Jones and equity market movement in ASEAN-5 countries: evidence from wavelet analyses. Heliyon, vol 7, issue 1 (2021).

[5] Dewi, C. K. JKSE and trading activities before after covid-19 outbreak. Research Journal of Accounting and Business Management, vol 4, issue 1 (2020) p. 1.

[6] Goh, T. S., Henry, H., & Albert, A. Determinants and prediction of the stock market during COVID-19: Evidence from Indonesia. The Journal of Asian Finance, Economics and Business, vol 8, issue 1 (2021) pp. 1–6.

[7] Baruník, J., Kočenda, E., & Vácha, L. Asymmetric volatility connectedness on the forex market. Journal of International Money and Finance, vol 77 (2017) pp. 39–56.

[8] Diebold, F. X., & Yilmaz, K. Measuring financial asset return and volatility spillovers, with application to global equity markets. The Economic Journal, vol 119, issue 534 (2009) pp. 158–171.

[9] Diebold, F. X., & Yilmaz, K. Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, vol 28, issue 1 (2012) pp. 57–66.

[10] Mensi, W., Maitra, D., Vo, X. V., & Kang, S. H. Asymmetric volatility connectedness among main international stock markets: A high frequency analysis. Borsa Istanbul Review, vol 21, issue 3 (2021) pp. 291–306.

[11] Shi, Y. What influences stock market co-movements between China and its Asia-Pacific trading partners after the Global Financial Crisis?. Pacific-Basin Finance Journal, vol 72 (2022).

[12] Chan-Lau, J. A., & Ivaschenko, I. Asian Flu or Wall Street virus? Tech and non-tech spillovers in the United States and Asia. Journal of Multinational Financial Management, vol 13, issue 4–5 (2003) pp. 303–322.

[13] Chuang, P. H., Lee, C. W., Chou, J. Y., Murugan, M., Shieh, B. J., & Chen, H. M. Anti-fungal activity of crude extracts and essential oil of Moringa oleifera Lam. Bioresource Technology, vol 98, issue 1 (2007) pp. 232–236.

[14] Achsani, N. A., & Strohe, H. G. Asymmetric stock market interdependencies: US dominance and spillover effects into Asia and Europe. In: Welfens, P.J.J. (Ed.), Integration in Asia and Europe: Historical Dynamics, Political Issues, and Economic Perspective. Springer (2004) pp. 145-164.

[15] King, M. A., & Wadhwani, S. Transmission of volatility between stock markets. Review of Financial Studies, vol 3, issue 1 (1990) pp. 5–33.

[16] Liu, Y. A., & Pan, M.S. Mean and volatility spillover effects in the U.S. and Pacific–Basin stock markets. Multinational Finance Journal, vol 1, issue 1 (1997) pp. 47–62.

[17] Liu, Y. A., Pan, M. S., & Shieh, J. C. P. International transmission of stock price movements: Evidence from the U.S. and five Asian-Pacific markets. Journal of Economics and Finance, vol 22, issue 1 (1998) pp. 59–69.

[18] Sims, C. A. Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered. NBER Working Paper (1980).

[19] Veiga, B., & McAleer, M. Multivariate volatility and spillover effects in financial markets. International Environmental Modeling and Software Society (2004).

[20] Miyakoshi, T. Spillovers of stock return volatility to Asian equity markets from Japan and the U.S. Journal of International Financial Markets, Institutions and Money, vol 13, issue 4 (2003) pp. 383–399.

[21] In, F., Kim, S., Yoon, J. H., & Viney, C. Dynamic interdependence and volatility transmission of Asian stock markets: Evidence from the Asian crisis. International Review of Financial Analysis, vol 10, issue 1 (2001) pp. 87–96.

[22] Lee, S. J. Volatility spillover effects among six Asian countries. Applied Economics Letters, vol 16, issue 5 (2009) pp. 501–508.

[23] Shahzad, S. J. H., Naeem, M. A., Peng, Z., & Bouri, E. Asymmetric volatility spillover among Chinese sectors during COVID-19. International Review of Financial Analysis, vol 75 (2021).

[24] Zhang, Z., Chen, Y., & Hou, W. Asymmetric risk spillover networks and risk contagion driver in Chinese financial markets: The perspective of economic policy uncertainty. Complexity, vol 2021 (2021).

[25] Balli, F., Hasan, M., Ozer-Balli, H., & Gregory-Allen, R. Why do U.S. uncertainties drive stock market spillovers? International evidence. International Review of Economics & Finance, vol 76 (2021) pp. 288–301.

[26] Potjagailo, G. Spillover effects from Euro area monetary policy across Europe: A factor-augmented VAR approach. Journal of International Money and Finance, vol 72 (2017) pp. 127–147.

[27] Bouri, E., Cepni, O., Gabauer, D., & Gupta, R. Return connectedness across asset classes around the COVID-19 outbreak. International Review of Financial Analysis, vol 73 (2021).

[28] BenSaïda, A. Good and bad volatility spillovers: An asymmetric connectedness. Journal of Financial Markets, vol 43 (2019) pp. 78–95.

[29] Collet, J., & Ielpo, F. Sector spillovers in credit markets. Journal of Banking & Finance, vol 94 (2018) pp. 267–278.

[30] Naeem, M. A., Peng, Z., Bouri, E., Hussain Shahzad, S. J., & Karim, S. Examining the asymmetries between equity and commodity ETFs during COVID-19. Resources Policy, vol 79 (2022).

[31] Akhtaruzzaman, M., Boubaker, S., & Sensoy, A. Financial contagion during COVID–19 crisis. Finance Research Letters, vol 38 (2021).

[32] Lee, T. Y., Zhong, Y., Zhou, J., He, X., Kong, R., & Ji, J. The outbreak of coronavirus disease in China: Risk perceptions, knowledge, and information sources among prenatal and postnatal women. Women and Birth, vol 34, issue 3 (2021) pp. 212–218.

[33] Balli, F., Hajhoj, H. R., Basher, S. A., & Ghassan, H. B. An analysis of returns and volatility spillovers and their determinants in emerging Asian and Middle Eastern countries. International Review of Economics and Finance, vol 39 (2015) pp. 311–325.

[34] Majdoub, J., & Ben Sassi, S. Volatility spillover and hedging effectiveness among China and emerging Asian Islamic equity indexes. Emerging Markets Review, vol 31 (2017) pp. 16–31.

[35] Arlan, R., Prasetyo, A. D., Pratiwi, A. P., & Ludwian, R. E. Relationship of Indonesia and U.S. aggregate stock returns pre and post global financial crisis (GFC). Eqien – Journal of Economics and Business, vol 11, issue 1 (2022) pp. 622 – 636.

[36] Boubaker, S., Liu, Z., Sui, T., & Zhai, L. The mirror of history: How to statistically identify stock market bubble bursts. Journal of Economic Behavior & Organization, vol 204 (2022) pp. 128–147.