Quantile-on-Quantile Spillover Analysis of International Stock Markets

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The relationship between two assets can be examined using various techniques such as correlation, lagged correlation, cointegration etc. Reference [1] presented a new method called Quantile-on-Quantile Spillover Analysis to examine the relationship between two assets. This approach involves estimating Quantile Vector Autoregression (QVAR) models across different quantiles and then calculating the adjusted total spillover index (TSI).

The authors used this method to study the dynamics of the interactions between international stock returns and the volatility index, VIX. They pointed out,

• There is an asymmetric relationship between the VIX and stock returns, with total spillover being higher during periods when the VIX is high and stock returns are low.
• The integration between the VIX and developed stock markets is significantly higher compared to emerging stock markets. The total spillover between the VIX and developed stock markets is greater than that with emerging markets.
• Outside of the U.S., the stock markets that exhibit the highest spillover with the VIX are those of Canada, Germany, France, and the UK. The high level of interconnectedness between these countries’ stock markets and the VIX can be attributed to the similarities in their business cycles with that of the U.S.
• The relationship between European stock markets and the VIX generally exhibits a homogeneous structure, showing little variability across countries.
• The connection between the VIX and Asia–Pacific countries is typically low. A similar result is observed for countries in the MENA region. Specifically, the total spillover between the Jordan stock market and the VIX is the lowest compared to other countries.
• There is a high level of connectedness between North American countries and the VIX. South American stock markets are more connected to the VIX among emerging countries. Overall, the patterns observed suggest that financial or bilateral linkage/integration may be playing a role in connectedness.

This is an interesting study. The proposed novel technique could have many applications in trading and risk management.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Buket Kirci Altinkeski, Sel Dibooglu, Emrah Ismail Cevik, Yunus Kilic, Mehmet Fatih Bugan, Quantile Connectedness between VIX and Global Stock Markets, Borsa Istanbul Review, 2024

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