The volatility spillover effects in Chinese, the U.S and Vietnamese stock markets: Implication for portfolio design and hedging strategy

Nguyen, Duy Anh (2020) The volatility spillover effects in Chinese, the U.S and Vietnamese stock markets: Implication for portfolio design and hedging strategy. [Dissertation (University of Nottingham only)]

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This paper investigates the conditional volatility and shocks transmission among Vietnam, China and the U.S in the context of equity markets; six AR(1)-GARCH(1,1) settings are employed with external regressors (shocks and conditional volatility from another market) in the conditional volatility equation. While the empirical findings for the Vietnam and the U.S markets show significant bidirectional shocks spillover effect, China is out of context as its both shocks and conditional volatility interdependency are insignificant. In addition, the dynamic conditional correlations between the three markets are examined employing DCC-MGARCH model. One noteworthy point from this model estimation is that all conditional correlations are mostly low and mean reverting; however, from 2016 onwards, the correlations between the markets raised at a proportionately significant amount. Drawing from the results from such models, the calculation, suggestion and simulation of optimal portfolio design and hedging ratios are analyzed.

The sample data is the returns of Vietnam Index (VNI), Shanghai stock exchange composite index (SHCOMP) and S&P500 composite index (SPCOMP), which are calculated based on the daily close price. The period is between 2005 and 2020, which expectantly illustrates a comprehensive picture of relationship among the markets under study. Based on the empirical findings in this paper, the researcher conducts further analysis on the relationship between the markets, by running a new DCC setting between pairs of markets and new spillover model focusing on the period of 2016 – 2019.

By investigating volatility spillover effects and conditional correlation, the paper provides an insight of the relationship between the three markets and determines whether diversification would make sense or not if one (from developed economies) were interested in Vietnamese (developing economy) stocks. Additionally, if one wanted to hedge his/her domestic portfolio (long position), he/she would want to know whether taking short position in Vietnamese stocks effectively would minimize the risk or not.

Item Type: Dissertation (University of Nottingham only)
Depositing User: Nguyen, Anh
Date Deposited: 13 Apr 2023 12:32
Last Modified: 13 Apr 2023 12:32

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