Volatility spillover among the sectors of emerging and developed markets: a hedging perspective

Abstract

AbstractThis study empirically investigates the volatility spillover among the sectors of emerging markets, that is, India and China and developed markets, that is, the United Kingdom (UK) and the United States (US). Focusing on financial services, auto, oil and gas, Information Technology (IT), healthcare and real estate sectors, the research employs the BEKK GARCH and GO-GARCH models to analyze the daily data. Results reveal that the own market’s conditional volatility is primarily responsible for the volatility spillover in every sector. Further, the study also found evidence of major cross-market volatility spillover in the oil and gas, IT, healthcare and real estate sectors of emerging and developed markets. Specifically, the US IT sector dominated other markets’ IT sectors. The hedge ratio indicates that hedging between sectors of the emerging and developed markets is the cheapest, contrasting with the higher cost for hedging solely with the emerging or developed markets sectors. Investors are advised to monitor and rebalance their portfolios based on the volatility and dynamics of developed market sectors for optimum return. Additionally, the study found that the BEKK model is better for risk-return optimization.

Keywords

• BEKK model
• go-garch
• hedge ratio
• sectoral index
• volatility spillover
• David McMillan, University of Stirling, UK