Common Volatility in Emerging Markets: Sources and Spillovers

Common Volatility in Emerging Markets: Sources and Spillovers

• Autor
• Amanda Seixas Diniz
• Co-autores
• João Victor Issler
• Resumo

• This paper investigates the determinants of common volatility (COVOL) in emerging markets. Unlike the existing literature, we incorporate the stochastic discount factor of Araujo, Galvão, and Issler (2024) as the common factor in the conditional mean of returns. We find that episodes of elevated emerging market COVOL are predominantly associated with oil market shocks with oil-producing and oil-exporting countries exhibiting the greatest sensitivity. Examining the relationship between emerging market COVOL, its developed market counterpart, Brent returns, and the VIX via TVP-VAR, we find that emerging market COVOL acts, on net, as a receiver of shocks, and that total connectedness intensifies during periods of global stress. These findings suggest that emerging market common volatility is driven by a distinct set of forces and remains systematically subordinate to developed market risk, with integration that tightens precisely when diversification benefits would be most valuable.

• Palavras-chave
• COVOL, Emerging markets, TVP-VAR, Connectedness, Risk Transmission
• Modalidade
• Comunicação oral
• Área Temática
• Econometria Financeira

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