Guntur Anjana Raju

Given Asian market recognition at the forefront of the investment domain, the research examines volatility spillover and asymmetric transmission between emerging and frontier stock markets of Asia. Stock returns of two frontier and nine emerging markets, during the data period spanning from August 2000 to March 2020, were analyzed using multivariate asymmetric GARCH-BEKK model around the global financial crisis (GFC). The study results suggest that the structure of cross-markets shocks and volatility spillover between emerging markets are higher during post-GFC. Therefore, this diminishes the possibility of portfolio diversification and investment opportunities to the investors in most of the Asian emerging markets. In the case of Asian frontier markets, most of the volatility generates due to its past shocks and volatility traverse from Asian emerging markets are considerably less. Hence, asset allocations prospects exist in the Asian frontier stock markets. Nevertheless, safe investment strategies need to design to reap diversification benefits from these markets, particularly during financial turmoil and market distress in the future.

Researchers argue that ignoring the structural breaks in the time-series variance can cause significant upward biases in the degree of persistence in estimated GARCH models. Against this backdrop, the present study empirically examines the effect of stock futures on the underlying stock’s volatility in India by incorporating the structural breaks with the help of ICSS test and AR (1)-GARCH (1, 1) model for 30 most liquid and actively traded underlying stocks and their associated futures contracts. The study period ranges from the 1st January 2000 or the listing date of the particular stock (whichever is prior) till 31st March 2019. The study contributes to the on-going debate regarding the effect of derivatives on the underlying stock market’s volatility in two ways. Firstly, by taking into consideration the breaks in the volatility and, secondly, studying the effect of single stock futures will allow us to evaluate company-specific response to futures trading directly. The study offers a mixed outcome for the stocks under consideration. However, there is evidence of a decline in unconditional volatility for the majority of the stocks. The overall findings indicate that trading in stock futures may not have any detrimental effect on the underlying stock’s volatility.