Article

‘Indian Stock Market Journal of Emerging Market Finance

1–30

Volatility’: A Study © 2019 Institute for Financial

Management and Research
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DOI: 10.1177/0972652719846321
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Suparna Nandy (Pal)1

Arup Kr. Chattopadhyay2

Abstract
The article attempts to examine interdependence between Indian stock
market and other domestic financial markets, namely, foreign exchange
market, bullion market, money market, and also Foreign Institutional
Investor (FII) trade and foreign stock markets comprising one regional
stock market represented by Nikkei of Japan and other stock market
for the rest of the world represented by Standard & Poor’s (S&P) 500
of the USA. Attempts are also made to examine asymmetric volatility
spillover, first, between the Indian stock market and other domestic
financial markets and second, between the Indian stock market and
global stock markets (represented by Nikkei and S&P 500) along with
the foreign exchange market. To measure linear interdependence
among multiple time series of financial markets multivariate Vector
Autoregression (VAR) analysis, Granger causality test, impulse response
function and variance decomposition techniques are used. For estima-
ting the volatility spillover among the aforesaid markets Dynamic
Conditional Correlation-Multivriate-Threshold Autoregressive Condi-
tional Heteroscedastic (DCC-MV-TARCH) (1, 1) model is applied on
daily data for a quite long period of time from 01 April 1996 to 31
March 2012. The results of multi­variate VAR analysis, Granger causality

1
Department of Economics, Vidyasagar Evening College, Kolkata, West Bengal, India.
Department of Economics, University of Burdwan, Burdwan, West Bengal, India.
2     

Corresponding author:
Suparna Nandy (Pal), Department of Economics, Vidyasagar Evening College, 39, Sankar
Ghosh Lane, Kolkata, West Bengal 700006, India.
E-mail: supa_nandi@rediffmail.com
2 Journal of Emerging Market Finance

test, variance decomposition analysis and impulse response function

estimation establish significant interdependence between domestic stock
market and different other financial markets in India and abroad. The
results of DCC-MV-TARCH (1, 1) model estimation further show signi-
ficant asymmetric volatility spillover between the domestic stock
market and the foreign exchange market and also from the domestic
stock market to bullion market and changes in gross volume of FII
trade. We also find (a) both way asymmetric volatility spillover between
the domestic stock market and the Asian stock market and (b) its
unidirectional movement from the world stock market to the domestic
stock market. The results of the study may help market regulators in
setting regulatory policies considering the inter-linkages and pattern of
volatility spillovers across different financial markets.

JEL Classification: G15, G17

Keywords
Volatility spillover, asymmetric volatility spillover,VAR, Granger causality,
impulse response function, variance decomposition, DCC-MV-TARCH
(1, 1)

1. Introduction
Economic liberalisation in the early 1990s along with deregulation of
interest rates and introduction of floating exchange rate system have made
Indian financial market gradually more integrated not only domestically
but also internationally. Along with these, opening up of the domestic
market for the foreign investors has become one of the most important
reformatory steps leading to strong integration of the Indian stock market
with that of the rest of the world. Although in the course of these years
Indian financial markets have been benefited for the increased domestic
and foreign financial market integration in different ways, but it has to
be remembered that during these years Indian markets have also become
vulnerable to global shocks as can be witnessed from sharp and asym-
metrical movements of the Indian stock indices as a result of a number
of contemporary catastrophic events, such as global financial meltdown
and European debt crisis.
Liberalisation and globalisation influenced the relation among diff­
erent components of domestic financial system as they brought before
investors several opportunities for greater portfolio diversification as
risk containment measures. Superior technology also enhanced the
Nandy and Chattopadhyay 3

scope of portfolio diversification for the investors. Common news has

been empirically recognised as an important cause of both inter and
intra country financial market integration. Globalisation led to increased
market for currencies in which the securities are denominated, thus,
creating interdependence between stock returns and exchange rate
changes. In the floating exchange rate regime and for increased volume
of transactions, financial markets volatilities have also increased and
there might be increased occurrence of volatility spillover. The causal
relationship between stock prices and exchange rates are explained in
theoretical models (the monetary models, the portfolio-balance model).
The monetary models of exchange rate determination present a robust
tool to link stock prices with foreign exchange rates where money supply,
interest rate, price level and inflation are taken into account to predict
exchange rate movements. Whereas, expectations regarding movements
of financial asset prices play an important role affecting exchange rate
dynamics in the portfolio-balance model. On the other hand, Dornbusch
and Fischer (1986), Hekman (1985), Sercu and Vanhulle (1992) among
others evidenced opposite direction of causality (i.e., the exchange rate
is a vital indicator of the stock price). It seems important to understand
empirically the volatility linkage between stock prices and exchange rates
in emerging economies, like India. Again, it is observed that bullion (both
gold and silver) is becoming an alternative area of investment domesti-
cally as well as internationally and we, therefore, have incorporated
the gold bullion market in the study for examining volatility spillovers
among domestic financial markets including stock market. Moreover,
in the question of execution of monetary policy of an economy, money
market plays a key role and it is expected that stock market movements
would be taken into consideration behind the policy decisions because
of their considerable impact on the economy. The money market is the
key link in the transmission mechanism of monetary policy to financial
markets, and finally, to the real economy (RBI, 2012). Call money rate
(CMR) is an important indicator of the money market and interest rate
structure of an economy is highly influenced by changes in the CMR.
These have great influences on the decision of companies while arrang-
ing finance and thus the corporate profits, thereby affecting the stock
market. Besides, with the opening up of the domestic economy for FII
trade, foreign investors have become very influential for Indian financial
markets. It is a popular belief that daily FII turnover is a major factor
behind stock market volatility in India. Therefore, while addressing the
issue of volatility spillover in India FII’s asset allocation has been taken
into consideration.
4 Journal of Emerging Market Finance

Still the researchers are looking for the answers regarding the nature
of the integration and the diffusion channels through which shocks dis-
seminate. A few literatures can be found focusing exclusively on spillovers
among different domestic asset prices while few others whose primary
objective was to examine inter-country spillovers for individual asset
prices alone. Apprehending greater domestic and international inter-
linkages of asset markets we found it necessary to model and estimate the
spillovers across select domestic as well as foreign financial markets in
a more comprehensive way. This may help investors to find out efficient
hedging and trading strategies. Better understanding of volatility spillover
among the financial markets is beneficial for portfolio managers as it helps
in reducing risk and derivative dealers are also benefited while determining
the values of derivative securities as their payoffs are dependent not only
on prices of multiple assets but also on their volatilities. Moreover, while
setting regulatory policies the policymakers should consider the volatility
linkage pattern among the financial markets because of their influence on
investment and risk management decisions.
Although there are different studies showing that globally financial
markets co-vary at a greater degree and there are asymmetries in volatility
transmission as a result of some common news impact, like 1987 stock
market crash, Asian currency crisis, etc., there are also literatures show-
ing that such linkages exist even in normal situation. In this study we try
to explore the impact of innovations in different segments of domestic
financial market in India, namely money market, foreign exchange market,
bullion market and capital market (represented by change in the gross
value of net FII turnover), and also foreign stock market on the volatility
of domestic stock market.
The rest of the article is organised in the following manner: Section
2 represents a brief literature survey relating to empirical research on
financial market inter-linkages and spillover effects; Section 3 identifies
the gap in the existing researches; Section 4 sets the objectives of the
study; Section 5 describes the study period and data base used; Section 6
presents methodological framework used in empirical analysis; Section
7 shows analysis of results and findings of the study and finally Section 8
concludes the study mentioning some ideas for future research.

2. Brief Literature Survey

There are a number of studies addressing the issue of volatility linkages/
transmission. A few of them also investigate the transmission mechanism
Nandy and Chattopadhyay 5

of price and volatility spillover across the major stock markets in the world
and obtain varying results mainly due to the use of particular techniques
and data over different periods.
King and Wadhwani (1990) estimated their contagion model for the
New York, London and Tokyo stock markets using high-frequency data
and found evidence of market contagion. Karolyi (1995) found short-
term price spillovers between the New York and Toronto stock markets
while estimating bivariate Generalized Autoregressive Conditional
Heteroscedastic (GARCH) model in their study. Koutmos and Booth
(1995) estimated an extended multivariate Exponential Generalized
Autoregressive Conditional Heteroscedastic (EGARCH) model on the
basis of daily open to close returns of New York, Tokyo and London stock
markets and witnessed asymmetric volatility transmission across the three
markets. Moreover, the authors found the evidence of more interdepend-
ence among the markets in the post 1987 crash period. Koutmos (1999)
observed presence of leverage effect in stock index returns of emerging
stock markets which means conditional variance is asymmetric due to
faster adjustment of prices to past negative returns. Ng (2000) evidenced
presence of volatility spillover from Japan (regional market) and US (world
market) to the Pacific-Basin markets though world factors were found to
be more influential. Hashmi and Xingyun (2001) estimated correlation and
VAR models for examining inter-linkages among New York, Tokyo and
five South East Asian stock markets and found increasing inter-linkages
among the South East Asian markets in the post-crisis period. Moreover,
the authors observed New York market to affect South East Asian market
significantly in both the periods. The study also considers Singapore
market to be the most influential in the region, even more than New York
market. Kumar and Mukhopadhyay (2002) investigated short-run dynamic
inter-linkages between the US and the Indian stock markets and observed
significant volatility spillover from NASDAQ Composite index to NSE
Nifty. Nath and Verma (2003) found evidence of no co-integration among
Asian stock markets represented by India, Singapore and Taiwan and no
presence of causality implying that the markets were not interlinked. Nair
and Ramanathan (2003) observed evidence of unidirectional causality from
NASDAQ composite index to NSE Nifty. A. Worthington and H. Higgs
(2004) examined the transmission of equity returns and volatility among
developed and emerging Asian equity markets using Baba-Engle-Kraft-
Kroner (BEKK) form of multivariate GARCH model and evidenced sign
of high integration among the Asian equity markets and no homogeneity
in volatility spillovers from developed to different emerging markets. The
authors also noticed that own volatility spillovers were relatively higher
6 Journal of Emerging Market Finance

than cross volatility spillovers, especially in emerging markets, implying

greater importance of domestic factors there.
Sheng-Yung Yang (2005) used Engle’s (2002) dynamic conditional
correlation (DCC) model to examine stock market correlations between
Japan vis-à-vis each of the Asian Four Tigers, namely, Taiwan, Singapore,
Hong Kong and South Korea. The author found evidence of volatility
contagion across markets and increasing bilateral correlations during the
period of high market volatilities. Kim, Moshirian, and Wu (2005) used
bivariate DCC-EGARCH model to examine the impact of initiation of
the European Monetary Union (EMU) on the stock market integration
dynamics and found visible regime shift in European stock market integra-
tion which, according to them, was the result of not only macroeconomic
integration brought by the introduction of EMU but also the development
of existing financial sector. Kuper and Lestano (2007) examined financial
markets interdependence in and between Thailand and Indonesia in a
DCC-MGARCH (Multivariate Generalized Autoregressive Conditional
Heteroscedastic) framework and found evidence of time-varying cor-
relations among financial markets both within country and also between
countries for each financial market, which got intensified all through
Asian financial crisis. Wang and Moore (2008) employed DCC-EGARCH
method to investigate the extent of co-movement of three major Central
Eastern European emerging markets with the aggregate euro zone market
and found sufficient evidence of dynamic correlations among the markets
especially during and after financial crisis. Siddiqui (2009) has examined
associations between Standard & Poor’s (S&P) CNX Nifty and selected
Asian and US stock markets, and found increasing interdependencies
among the indices in the second period of his study. From the Granger
causality he has found no clear direction of relationships among the
markets, which, according to the author is the indication of decreasing
influence of a few markets notably that of the USA. Durai and Bhaduri
(2009) analysed the correlation structure of the Indian stock market with
the world stock markets and found very low correlation and slow pace of
integration between the Indian stock market with that of Asian and other
developed markets.
A. Hakim and M. McAleer (2010) have used the VARMA(1,1)-
AGARCH(1,1) model of Hoti, Chan, and McAleer (2002) to examine the
mean and volatility spillovers across bond, stock and foreign exchange
markets in Australia, Japan, New Zealand, Singapore and the USA. The
authors have witnessed the evidence of international mean spillovers in
individual markets to be more general rather than across markets, whereas,
volatility spillovers have been found to be strong both across markets and
Nandy and Chattopadhyay 7

within individual markets and in all the cases the USA has been observed
to be the most influential one. Joshi (2011) has tried to examine the co-
movement of stock markets of USA, Brazil, Mexico, China and India and
found evidence of co-integration among the markets under study. The
author has also witnessed relatively higher speed of adjustment of the
Indian stock market. Li and Giles (2013) have used BEKK (1,1) model
to examine the linkages of stock markets across the USA, Japan and six
Asian developing countries (namely, China, India, Indonesia, Malaysia,
Philippines and Thailand) and have found significant one-way shock and
volatility spillover from the US market to both the Japanese and the Asian
emerging markets except during the Asian financial crisis when there
was stronger and both-way volatility spillover between the US market
and the Asian markets. V. K. Natarajan, Robert, Singh, and Priya (2014)
have investigated the mean-volatility spillover effects among five major
national stock markets (namely, Australia, Brazil, Germany, Hong Kong
and US) using the GARCH-mean model. The authors have found cross-
mean and volatility spillovers from the USA market to the Australian and
Germany markets; also, the past USA returns and volatility shocks have
been found to have great effects on Germany and Australia with varying
degrees of intensity. The authors have identified the US market as the most
influential market among the markets under their study. Herrera, Salgado,
and Ake (2015) have found evidence of one-way volatility spillovers from
the World Market to Mexican market and the strong association between
the Mexican and the World market indices has been observed not only
during high volatility regime but also in low volatility period, reducing the
potential diversification benefits in both the cases, which are unlikely to
occur according to the standard models of international portfolio theory.
Baek and Oh (2016) have examined the volatility spillover aspects of
realised volatilities for the log returns of the Korea Composite Stock
Price Index (KOSPI) and the Hang Seng Index (HIS) using Leverage
Heteroskedastic Autoregressive Realised Volatility (LHAR) model and
have found significant unidirectional daily volatility spillover from the
HSI to the KOSPI.
There are few other studies also which explore the volatility linkages
and spillovers among different asset types within an economy or differ-
ent components of the same financial system for addressing the issue of
domestic financial integration.
Fleming, Kirby, and Ostdiek (1998) used GMM for predicting volatility
linkages between stock, bond and money markets and observed strong
volatility linkages between the markets which were found become even
stronger after 1987 stock market crash. Ebrahim (2000) investigated
8 Journal of Emerging Market Finance

information transmission, if any, between foreign exchange (US/Canadian

dollar, Deutsche mark and Japanese yen) and related money markets
using trivariate GARCH estimation method and found strong evidence
of volatility spillovers in all the three cases and volatility spillovers were
found to be asymmetric in some cases. H. R. Badrinath and P. G. Apte
(2005) used a multivariate EGARCH framework in their study and found
asymmetric volatility spillover across stock, foreign exchange and call
money markets in India where, stock market was found to have greatest
asymmetric impact on the other two markets. Banerjee and Sarkar (2006)
used FII trade as an exogenous variable while estimating different GARCH
models and found no significant impact of increasing participation of FII
on volatility of the Indian stock market. Xiong and Han (2015) have used
Granger causality multivariate stochastic volatility (GC-MSV) model to
examine volatility spillover effects between the foreign exchange and
stock markets and found evidence of asymmetric bi-directional volatil-
ity spillover between the two markets, for both in the continued Ren Min
Bi (RMB) appreciation and constant RMB shock stages, although in the
second case the volatility spillover effects have not been found to be as
significant as in the stage of continued RMB appreciation.

3. Research Gap
The existing literature reveals to the authors that in the context of India,
there remains a scope for exploring the nature of volatility inter-linkages and
examine the existence of asymmetric volatility spillovers, if any, between
Indian stock market on the one hand and other components of domestic
financial system and also the global stock markets on the other. Moreover,
to the best of the authors’ knowledge the volatility spillovers among the
domestic stock market, money market, bullion market and FII trade have
not been so far analysed in India using daily data. In the existing studies
on volatility spillover, it is observed that mainly multivariate model with
constant conditional correlation (CCC) assumption has been used. But in
reality the correlation structure does not remain constant over time; rather
DCC is more appropriate postulate than CCC and our estimated model
corroborates that. Moreover, we have found hardly any study in the Indian
context that has tried to capture the feature of asymmetry in the volatility
spillover process across domestic as well as foreign financial markets, which
is also necessary as it is well evidenced (Black, 1976; Christie, 1982) that
volatility is higher in a falling market (in response to negative news) than
that in a rising market (having positive news). So we feel that not only the
Nandy and Chattopadhyay 9

presence of volatility spillover with over time changed correlation struc-

ture, but also the presence of asymmetric feature in the volatility spillover
process need to be examined in a multivariate setting in the Indian context,
unlike other existing studies in this field. This study permits own market and
cross-market innovations to have an asymmetric impact on the volatility of
the market concerned. The news generated in one market can be evaluated
both in terms of size and sign by the other markets in a dynamic setting.

4. Objectives and Significance of the Study

The objectives of the study are to address the following issues in relation
with the Indian stock market:

1. Is there any evidence of interdependence between the stock mar-

ket and different other components of domestic financial system
(namely, foreign exchange market, bullion market, money market
and change in gross volume of FII trade) in India and foreign
stock markets?
2. If there is any evidence of volatility spillover between the stock
market and different other domestic financial markets, are they
asymmetric in nature?
3. Is there any evidence of asymmetric volatility spillover between
the domestic stock market and foreign stock markets represented
by a regional and a world stock market?

The knowledge regarding the volatility interdependence between the

domestic stock market and different other components of domestic finan-
cial market as well as foreign stock markets is very important for taking
any decision regarding investment or management of risk while hedging
against shocks generated across markets. It also helps market regulators in
fixing appropriate regulatory policies taking into consideration the pattern
of volatility inter-linkages among different financial markets.

5. Study Period and Database

In view of measuring interdependence between different domestic and
foreign financial markets and to examine asymmetric volatility spillover
across the markets we have used daily closing prices of S&P CNX Nifty
as representative of Indian stock market, collected from the website
10 Journal of Emerging Market Finance

http://nseindia.com, and that of NIKKEI and S&P 500 as representa-

tives of regional and world stock market respectively collected from
the website http://finance.yahoo.com for the study period spanning from
1 April 1996 to 31 March 2012. Daily closing spot price of gold bullion
in Mumbai and daily INR/USD exchange rate are used to represent the
Indian bullion market and foreign exchange market, respectively, data
of both of which are obtained from various daily issues of Economic
Times, Mumbai. Domestic money market is represented by average
daily CMR whose data is obtained from different issues of monthly
bulletin of Reserve Bank of India though it is only available from 4 May
1998. Therefore, while examining volatility inter-linkages and volatility
spillover of money market with other domestic financial markets our
study period is shortened to 4 May 1998 to 31 March 2012. Moreover,
daily gross volume of FII trade (sum of purchase and sales volume) is
included in the study as it is now commonly believed to be an important
determinant of the stock market volatility in India. The FII trade data
is obtained from the website http://nseindia.com but only from 4 April
2006. Thus, when we examine volatility inter-linkages and volatility
spillover between FII trade in India with other domestic and foreign
financial markets, the span of our study period is reduced and effectively
becomes 4 April 2006 to 31 December 2012. S&P CNX Nifty is cur-
rently the most popular stock index in India and it is a major player in
the Indian stock market. Presently, NIKKEI, a stock market index for the
Tokyo Stock Exchange (TSE), is the most extensively quoted average of
Japanese equities and is used in our study as the representative of Asian
stock market. On the other hand the S&P 500 is recognised worldwide
as one of the most influential equity indices and is regarded as the best
representative of the US stock market by many (Durai & Bhaduri, 2009;
Engle & Sheppard, 2001; Hakim & McAleer, 2010; Joshi, 2011; Karolyi,
1995; Siddiqui, 2009). Therefore, S&P 500 index is used in the present
study as the representative of world stock market, other than the Asian
one. The accuracy and reliability of all these data has been checked also
from other available sources.
The daily closing prices of all the financial variables have been trans-
formed into daily continuous returns which are the logarithmic differences
of prices of two successive periods, that is,

R i, t = log e (Pi, t / Pi, t - 1)

where Ri,t is continuous daily return at time t, and Pi,t–1 and Pi,t are two
successive daily closing prices of ith financial market. In case of the daily
Nandy and Chattopadhyay 11

gross volume of FII trade we have transformed it into the change in gross
volume of FII trade which is calculated as: RFII,t = FIIt – FIIt–1, where FIIt–1
and FIIt are gross volumes of FII trade for two consecutive dates.

6. Methodology
Stationarity of all the return series has been checked by Augmented
Dickey–Fuller (ADF) test (1979). To measure linear interdependence
among multiple time series of financial markets, all of which have already
been found stationary in the study, the multivariate VAR model is used and
in the model all the market return series are used as endogenous variables.
To understand the causal relationship between the returns in financial
variables in pairs we carry out test for Granger causality. For explaining
economic significance over and above the statistical significance we also
analyse impulse response function and variance decomposition. It may
be noted that impulse response function explains impact of an exogenous
shock in one variable on the other variables of the system. Here we also
use the impulse response function to analyse the impact of innovation
(shock) of the ith market on the jth market return and vice versa. By vari-
ance decomposition we try to analyse how much variation in ith market
return is explained by its own lag and how much is due to shocks to the
other financial markets. We use econometric software package EViews7
for estimation of multivariate VAR, Granger causality, impulse response
functions and variance decomposition analysis.
The dynamic relationships among all the data series are estimated
using multivariate VAR model in which returns in all the markets are
endogenous variables, as mentioned earlier.
Let Ri,t be the return in variable i at time t, [i = 1, 2, 3, 4, 5 where,
1 represents Gold Bullion (RTGOLD), 2 represents foreign exchange
rate (RTEX), 3 represents S&P CNX Nifty (RTNIF), 4 represents S&P
500 (RTSP) and 5 represents NIKKEI (RTNIK)]. Further Ri,t–n be the
return in variable i at time t - n (n being the length of lag which is taken
either 1 or 2). Multivariate VAR model can be represented symbolically
as follows:

R i, t = i i, 0 + | j = 1 | n = 1 i i, j, n R j, t - n + f i, t , for i = 1, 2, …, 5.
10 2

j = 1, 2, 3,…, 10.
n = 1, 2.
12 Journal of Emerging Market Finance

where, fi,t’s are the stochastic errors, termed as impulses or shocks or

innovations in VAR system. The maximum lag length (here 2) is chosen
by using Akaike and Schwarz criteria. The coefficients qi,j,n’s represent
the respective effects of own lagged returns and lagged returns of other
markets on the present return of the market concerned. If the parameters
are found to be significant, then there exists a bi-directional causal relation
among the variables. The same model has been estimated separately to
examine the influence of change in FII trade (with other five endogenous
variables related to domestic as well as foreign markets) and also of change
in CMR (with all three endogenous variables related to domestic markets
only). Separate estimations have been made due to the consideration of dif-
ferent study periods as per availability of data and in case of CMR, unlike
others, only domestic market variables have been considered deliberately
to examine their mutual influences. To understand the dynamic relationship
among the macroeconomic financial variables we report both the Granger
causality test and VAR parameter estimates in our study.
The dynamic relationship is also investigated by analysing the impulse
response function and variance decomposition. An impulse response
function traces out the impact of a one standard deviation shock to one of
the error terms [innovation] on current and future values of endogenous
variables. A shock to the ith variable directly affects the ith variable and
through the dynamic structure of VAR it is transmitted to all other vari-
ables in the system, for example, a change in fi,t will immediately affect
R1,t and also affect all future values of R1, R2, R3 R4, and R5. By variance
decomposition analysis, on the other hand, variation in an endogenous
variable is decomposed into component shocks to the endogenous vari-
ables in the VAR system. From it we can get the relative importance of
each random innovation to the VAR variables.
To measure asymmetric volatility spillover across the financial markets
in our study the multivariate extension of Threshold GARCH [TARCH]
(1, 1) model has been used under DCC assumption and therefore, can be
named as DCC-MV-TARCH (1, 1) asymmetric volatility spillover model.
With the help of this model the news generated in one market can be
evaluated both in terms of size and sign by the other markets (Badrinath
& Apte, 2005). In the study the DCC-MV-TARCH (1, 1) model has been
used following Engle (2002) whose general specification is as follows:
There are i number of conditional mean equations in the model as
specified below:

R i, t = i i, 0 + | j i i, j, 1 R j, t - 1 + f i, t, f i, t /} t - 1 ~N (0, H ii, t)
(1)
for 3 # i, j # 4 in our study.
Nandy and Chattopadhyay 13

where, ei,t is the stochastic error terms in the ith market, and yt–1 is the
information set available at time t - 1.
The variance equation with spillover and asymmetric effects is
represented as:

H ii, t = ~ i0+ | j a ij f 2j, t - 1 + b i H ii, t - 1 + d j f 2j, t - 1 I f 1 0 (f j, t - 1) (2)

where ~i0 >0 and the conditional variances are finite if bi < 1. The volati­
lity spillover effect from market j to market i is captured by aij, where i ≠ j.
I is an indicator function for e < 0 [negative residual]. Positive value of dj
implies that negative residuals (i.e., bad news) in market j tend to increase
the volatility in market i (represented by Hii,t) more than that of positive
ones. On the other hand, if dj is found to be negative, negative residuals in
market j tend to increase the volatility in market i less than positive ones.
The conditional covariances in the DCC-MV-TARCH (1, 1) model
are defined as:
H ij, t = D t R t D t (3)

where Dt = diagonal ( h 11, t, fff ., h NN, t ), hii,t is defined as univari-

ate GARCH (1, 1) model and

R t = diagonal (s -11,1/2t , fff .s -NN1/2, t) S t diagonal (s -11,1/2t , fff .s -NN1/2, t) (4)

where the N×N symmetric positive definite matrix St[= (sij,t)] is given
by:
S t = (1 - a - b) Sr + a u t - 1 u /t - 1 + b S t - 1 (5)

with ut = et/Dt
Sr is the N×N unconditional covariance matrix of standardised residual
ut, and ‘a’ and ‘b’ are nonnegative scalar parameters satisfying the
condition a + b < 1. These two scalar parameters govern a ‘GARCH
(1, 1)’ model on covariance matrix as a whole. The actual H matrix is
generated by using univariate GARCH models for the variances along
with the correlation matrix provided by the ‘S’ [Software Package RATS
User’s Guide].

s ij, t h ii, t .h jj, t

H ij, t = D t R t D t = (6)
s ii, t s jj, t
14 Journal of Emerging Market Finance

The maximum likelihood method is used to estimate the model and

the log likelihood function following Engle (2002) and Engle e<0 and
Sheppard (2001) can be written as:

L (Q) = - NT/2 ln (2π) - 0.5 | t = 1 [ln (R t) + 2 ln | D t | + u t/ R t-1 u t] (7)

T

where the parameter vector ‘U’ to be estimated contains the para‑

meter set of the univariate TARCH models along with the parameter set
of dynamic correlation structure. ut is the vector of standardised residuals
(ut = et/Dt) at time t. The Broyden–Fletcher–Goldfarb–Shanno (BFGS)
algorithm is used to produce the maximum likelihood estimates of
parameters and their corresponding asymptotic standard errors.

7. Data Analysis and Findings

The ADF unit root test is performed to check the stationarity of daily
return series of each representative of the domestic and foreign financial
markets and the results of the test are presented in Table 1. From Table
1 it is visible that all the return series are stationary. To measure linear
interdependence among multiple time series of financial markets which
are all found to be stationary, the multivariate VAR model is used and in
the model all the market return series are used as endogenous variables.
The results of VAR estimation are presented in Table 2. Since our objective
is to examine interdependence between domestic stock market and other

Table 1. Estimated Result of ADF Test of Return Series of Selected Domestic

and Foreign Financial Markets

Market ADF Test Statistic*

Return in gold bullion market (RTG) -26.82840
Return in foreign exchange market (RTEX) -26.25317
Return in S&P CNX Nifty (RTNIF) -27.75388
Return in money market (RTCMR) -36.61062
Change in gross volume of FII trade (CHFII) -21.12778
Return in S&P 500 (RTSP) -30.49912
Return in Nikkei (RTNIK) -29.47499
Source: Authors’ own calculations.
Note: *ADF test statistic is estimated by fitting the equation of the form:
Dy t = { + d y t - 1 + | j = 1 i j Dy t - j + n t .
4
Nandy and Chattopadhyay 15

Table 2. Estimated Results of Multivariate VAR Model

RTG RTEX RTNIF RTSP RTNIKKEI

RTG(−1) 0.016801 0.017325* 0.006884 0.012398 −0.032041
(0.01591) (0.00588) (0.02787) (0.02231) (0.02328)
(1.05632) (2.94553) (0.24700) (0.55571) (−1.37622)
RTG(−2) −0.001200 −0.020059* 0.093065* 0.004679 0.009060
(0.01589) (0.00588) (0.02785) (0.02229) (0.02326)
(−0.07548) (−3.41275) (3.34155) (0.20989) (0.38943)
RTEX(−1) 0.040855 −0.019997 −0.032270 0.000942 −0.005797
(0.04402) (0.01628) (0.07715) (0.06175) (0.06444)
(0.92799) (−1.22829) (−0.41830) (0.01526) (−0.08996)
RTEX(−2) −0.020133 −0.018811 −0.113049 −0.026500 −0.183427*
(0.04299) (0.01590) (0.07533) (0.06030) (0.06293)
(−0.46830) (−1.18324) (−1.50066) (−0.43946) (−2.91486)
RTNIF(−1) 0.006988 −0.034063* 0.017936 0.028040** 0.046965*
(0.00943) (0.00349) (0.01652) (0.01323) (0.01380)
(0.74100) (−9.76797) (1.08542) (2.11992) (3.40241)
RTNIF(−2) −0.002952 −0.007935** −0.038713** 0.008466 −0.003658
(0.00950) (0.00351) (0.01664) (0.01332) (0.01390)
(−0.31091) (−2.25961) (−2.32659) (0.63560) (−0.26319)
RTSP(−1) −0.035411* −0.061256* 0.273749* −0.077741* 0.488100*
(0.01166) (0.00431) (0.02042) (0.01635) (0.01706)
(−3.03814) (−14.2119) (13.4034) (−4.75527) (28.6096)
RTSP(−2) 0.015445 0.008656*** 0.082876*−0.034503*** 0.080298*
(0.01297) (0.00480) (0.02273) (0.01819) (0.01899)
(1.19072) (1.80466) (3.64630) (−1.89645) (4.22929)
RTNIKKEI 0.008913 0.018173* −0.065266* −0.031579** −0.138951*
(−1)
(0.01119) (0.00414) (0.01961) (0.01570) (0.01638)
(0.79641) (4.39079) (−3.32787) (−2.01160) (−8.48167)
RTNIKKEI −0.004648 0.001607 −0.004707 −0.055717* −0.055635*
(−2)
(0.01045) (0.00386) (0.01831) (0.01465) (0.01529)
(−0.44494) (0.41604) (−0.25710) (−3.80223) (−3.63815)
C 0.000422* 0.000140** 0.000308 0.000168 −0.000444**
(0.00015) (5.5E-05) (0.00026) (0.00021) (0.00022)
(2.83189) (2.53976) (1.17900) (0.80172) (−2.03265)
R2 0.004052 0.089893 0.051186 0.012784 0.189670
Adj. R2 0.001545 0.087602 0.048798 0.010300 0.187631
Sum sq. 0.348307 0.047632 1.069504 0.685271 0.746283
resids
Standard 0.009363 0.003462 0.016407 0.013133 0.013705
Error (S. E.)
equation
(continued)
16 Journal of Emerging Market Finance

(Table 2 continued)

RTG RTEX RTNIF RTSP RTNIKKEI

F-statistic 1.616468*** 39.24185* 21.43318* 5.145046* 92.99423*
Log 12961.62 16924.87 10726.86 11613.57 11443.67
likelihood
Akaike AIC −6.501314 −8.490899 −5.379448 −5.824583 −5.739293
Schwarz SC −6.483947 −8.473532 −5.362081 −5.807216 −5.721926
Mean 0.000428 0.000102 0.000416 0.000191 −0.000290
dependent
Standard 0.009370 0.003625 0.016823 0.013201 0.015206
Deviation
(S. D.)
dependent
Determinant 7.72E-21
residual
covariance
Log 63985.44
likelihood
Akaike −32.09359
information
criteria
Schwarz −32.00676
criteria
Source: Authors’ own calculations.
Notes: *, ** and *** indicate significance of the parameter at 1%, 5% and 10%
significance levels, respectively. Standard errors & t-statistics in parentheses.

domestic as well as foreign financial markets, we, therefore, like to report

from the table concerned only the results related to Nifty. From the column
of Nifty in Table 2 we find that individually only RTG at lag-2, RTSP at
lag-1 and lag-2 and RTNIKKEI at lag-1 are statistically significant. But
collectively F-statistic is found to be significantly different from zero and
fairly high. So we cannot reject the hypothesis that collectively all the
lagged terms are statistically significant.
The results of pair wise Granger causality test for lag-1 and lag-2 are
presented in Table 3. The results show that in lag-1 return in Nifty and
return in gold bullion do not Granger cause one another but there is one
way Granger causality running from return in Gold bullion to return in
Nifty in lag-2. Return in Nifty is found to be Granger cause of return in
exchange rate both in lag-1 and lag-2 but the converse is not true. Return
in S&P 500 does Granger cause return in Nifty both in lag-1 and lag-2 but
return in Nifty is not found to be Granger cause of return in S&P 500 in
Nandy and Chattopadhyay 17

Table 3. Results of Pair Wise Granger Causality Test

Null Hypothesis Obs F-Statistic Probability

Sample: 1 3986
Lags: 1
RTEX does not Granger cause RTG 3985 0.41701 0.51847
RTG does not Granger cause RTEX 12.7995* 0.00035
RTNIF does not Granger cause RTG 3985 0.33048 0.56541
RTG does not Granger cause RTNIF 0.60455 0.43689
RTSP does not Granger cause RTG 3985 9.62405* 0.00193
RTG does not Granger cause RTSP 0.39309 0.53071
RTNIKKEI does not Granger cause 3985 1.11223 0.29166
RTG
RTG does not Granger cause 10.7621* 0.00104
RTNIKKEI
RTNIF does not Granger cause RTEX 3985 109.618* 0.00000
RTEX does not Granger cause RTNIF 1.12944 0.28796
RTSP does not Granger cause RTEX 3985 248.987* 0.00000
RTEX does not Granger cause RTSP 0.19159 0.66162
RTNIKKEI does not Granger cause 3985 2.96079*** 0.08538
RTEX
RTEX does not Granger cause 12.9038* 0.00033
RTNIKKEI
RTSP does not Granger cause RTNIF 3985 167.671* 0.00000
RTNIF does not Granger cause RTSP 1.41712 0.23395
RTNIKKEI does not Granger cause 3985 1.13517 0.28674
RTNIF
RTNIF does not Granger cause 51.9237* 6.9E-13
RTNIKKEI
RTNIKKEI does not Granger cause 3985 5.99561** 0.01438
RTSP
RTSP does not Granger cause 858.881* 0.00000
RTNIKKEI
Lags: 2
RTEX does not Granger cause RTG 3984 0.36662 0.69309
RTG does not Granger cause RTEX 13.9754* 8.9E-07
RTNIF does not Granger cause RTG 3984 0.18818 0.82847
RTG does not Granger cause RTNIF 6.05021* 0.00238
RTSP does not Granger cause RTG 3984 6.10466* 0.00225
RTG does not Granger cause RTSP 0.14126 0.86827
RTNIKKEI does not Granger cause 3984 0.54757 0.57840
RTG
RTG does not Granger cause 5.46229* 0.00428
RTNIKKEI
(continued)
18 Journal of Emerging Market Finance

(Table 3 continued)

Null Hypothesis Obs F-Statistic Probability

RTNIF does not Granger cause RTEX 3984 56.3533* 0.00000
RTEX does not Granger cause RTNIF 1.85412 0.15673
RTSP does not Granger cause RTEX 3984 126.124* 0.00000
RTEX does not Granger cause RTSP 0.10962 0.89618
RTNIKKEI does not Granger cause 3984 1.62668 0.19671
RTEX
RTEX does not Granger cause 9.77661* 5.8E-05
RTNIKKEI
RTSP does not Granger cause RTNIF 3984 87.3002* 0.00000
RTNIF does not Granger cause RTSP 1.88599 0.15181
RTNIKKEI does not Granger cause 3984 0.41941 0.65746
RTNIF
RTNIF does not Granger cause 26.4413* 3.9E-12
RTNIKKEI
RTNIKKEI does not Granger cause 3984 7.78459* 0.00042
RTSP
RTSP does not Granger cause 441.251* 0.00000
RTNIKKEI
Source: Authors’ own calculations.
Notes: * , ** and *** indicate significance of the parameter at 1%, 5% and 10% significance
levels, respectively.

Table 4. Estimated Results of Variance Decomposition

Period S.E. RTG RTEX RTNIF RTSP RTNIKKEI

Variance decomposition of RTG
1 0.009350 100.0000 0.000000 0.000000 0.000000 0.000000
2 0.009365 99.73255 0.029340 0.003975 0.218347 0.015789
3 0.009369 99.63877 0.037234 0.005842 0.298656 0.019501
4 0.009369 99.63831 0.037319 0.005848 0.298694 0.019827
5 0.009369 99.63778 0.037358 0.005888 0.298882 0.020092
6 0.009369 99.63776 0.037358 0.005892 0.298895 0.020095
7 0.009369 99.63776 0.037358 0.005892 0.298896 0.020097
8 0.009369 99.63776 0.037358 0.005892 0.298897 0.020097
9 0.009369 99.63776 0.037358 0.005892 0.298897 0.020097
10 0.009369 99.63776 0.037358 0.005892 0.298897 0.020097
Variance decomposition of RTEX:
1 0.003458 0.019082 99.98092 0.000000 0.000000 0.000000
2 0.003611 0.392754 91.75169 3.076358 4.337821 0.441381
3 0.003624 0.741652 91.12217 3.134526 4.551238 0.450411
4 0.003624 0.750104 91.10305 3.141486 4.551376 0.453987
5 0.003624 0.750196 91.10075 3.141845 4.551427 0.455784
Nandy and Chattopadhyay 19

Period S.E. RTG RTEX RTNIF RTSP RTNIKKEI

6 0.003624 0.750220 91.10064 3.141891 4.551463 0.455784
7 0.003624 0.750221 91.10063 3.141891 4.551462 0.455793
8 0.003624 0.750221 91.10063 3.141891 4.551463 0.455793
9 0.003624 0.750221 91.10063 3.141891 4.551463 0.455793
10 0.003624 0.750221 91.10063 3.141891 4.551463 0.455793
Variance decomposition of RTNIF:
1 0.016384 0.001266 3.696235 96.30250 0.000000 0.000000
2 0.016777 0.014830 3.611957 92.02810 4.081364 0.263751
3 0.016816 0.289358 3.634490 91.67576 4.135667 0.264728
4 0.016820 0.290092 3.634872 91.62944 4.173364 0.272236
5 0.016821 0.290086 3.634940 91.62716 4.175581 0.272230
6 0.016821 0.290085 3.634925 91.62679 4.175679 0.272523
7 0.016821 0.290086 3.634924 91.62674 4.175731 0.272524
8 0.016821 0.290086 3.634925 91.62673 4.175731 0.272527
9 0.016821 0.290086 3.634925 91.62673 4.175732 0.272527
10 0.016821 0.290086 3.634925 91.62673 4.175732 0.272527
Variance decomposition of RTSP:
1 0.013115 0.475821 1.640269 2.573833 95.31008 0.000000
2 0.013167 0.490721 1.634347 2.579482 95.19520 0.100245
3 0.013197 0.491502 1.628829 2.575047 94.94884 0.355778
4 0.013199 0.492356 1.628700 2.576586 94.92905 0.373314
5 0.013200 0.492345 1.628905 2.576603 94.92739 0.374756
6 0.013200 0.492359 1.628948 2.576591 94.92734 0.374761
7 0.013200 0.492360 1.628951 2.576590 94.92732 0.374783
8 0.013200 0.492361 1.628951 2.576590 94.92732 0.374783
9 0.013200 0.492361 1.628951 2.576590 94.92732 0.374783
10 0.013200 0.492361 1.628951 2.576590 94.92732 0.374783
Variance decomposition of RTNIKKEI:
1 0.013686 0.012393 2.252465 3.018508 1.677935 93.03870
2 0.015163 0.264872 2.049805 3.375999 17.04221 77.26711
3 0.015192 0.276741 2.159313 3.366026 17.00100 77.19692
4 0.015203 0.278687 2.162337 3.361220 17.09553 77.10223
5 0.015204 0.279555 2.163113 3.361000 17.09799 77.09834
6 0.015204 0.279553 2.163078 3.360948 17.09879 77.09763
7 0.015204 0.279561 2.163090 3.360943 17.09892 77.09749
8 0.015204 0.279561 2.163090 3.360943 17.09892 77.09749
9 0.015204 0.279561 2.163090 3.360943 17.09892 77.09749
10 0.015204 0.279561 2.163090 3.360943 17.09892 77.09749
Source: Authors’ own calculations.
Note: Ordering: RTG > RTEX > RTNIF > RTSP > RTNIKKEI.
20 Journal of Emerging Market Finance

any lag. We find one way Granger causality running from return in Nifty
to return in NIKKEI in both the lags.
From the variance decomposition results presented in Table 4, it is
evident that any variation of return in Nifty is explained mainly by its
own lagged return (>96% in lag-1, >92% in lag-2 and >91% thereafter)
than by the lagged returns in other markets. It is also to be noted that (a)
lagged return in exchange rate is able to explain more than 3 per cent and
(b) lagged return in S&P 500 is able to explain more than 4 per cent vari-
ation of Nifty return. On the other hand, more than 99 per cent variation
in exchange rate return is explained by its own lagged returns and that
too by lag-1; thereafter it comes down to more than 91 per cent whereas
lagged return in Nifty is able to explain more than 3 per cent and lagged
return in S&P 500 is able to explain more than 4 per cent from lag-2 of the
variation in exchange rate return. Variations in returns in Gold bullion, S&P
500 and Nikkei are also mainly explained by their own lagged returns. It
is also observed that lagged return in Nifty explains more than 2 per cent
of variation and lagged return in exchange rate explains more than 1 per
cent of variation in S&P 500 return. Again lagged return in Nifty explains
more than 3 per cent, lagged return in exchange rate explains more than
2 per cent and lagged return in S&P 500 explains more than 1 per cent in
lag-1 but more than 17 per cent thereafter of variations in Nikkei return.
These results broadly indicate evidence of interdependence among the
financial variables supporting the earlier results of Granger causality test.
The impulse responses of returns in each variable to shocks in all the
variables under study are presented in Figure 1. From Figure 1 it is found
that all the returns in the study are mostly autoregressive but effective for
only two lags supporting the result of VAR estimates. When we concentrate
on impulse response of returns in Nifty to one standard deviation inno-
vations in all the endogenous variables, the interdependence among the
variables representing different financial markets is evident from Figure 1.
When we introduce changes in FII trade and CMR (of course, with
different study periods as noted earlier) in our study regarding market
interdependence, from the respective estimated results [results are not
shown here to save space] of multivariate VAR analysis, Granger causality
test, variance decomposition and impulse response function we, in general,
observe the evidence of significant interdependence between domestic
stock market and different other financial markets in India and abroad.
Table 5 presents the results of the DCC-MV-TARCH (1, 1) model
estimation with gold bullion, foreign exchange rate and Nifty. Since in
this study we are interested in examining volatility spillovers from and
to the domestic stock market only, the results related to domestic stock
Nandy and Chattopadhyay 21

Figure 1. Combined Impulse Response

Source: Authors’ own calculations.

Table 5. Maximum Likelihood Estimate of DCC-MV-TARCH (1, 1) Model for

Gold Bullion, Foreign Exchange and Domestic Stock Market

Variable Coefficient Standard Error T-statistic Significance

Parameters of mean equation†
q1,0 2.0005e-004*** 1.1929e-004 1.67690 0.09356184
q1,1 0.0460* 0.0174 2.64100 0.00826618
q1,2 0.0664 0.0417 1.59089 0.11163496
q1,3 3.3814e-003 7.4635e-003 0.45306 0.65050564
q2,0 1.8947e-007 2.1941e-005 0.00864 0.99311004
(continued)
22 Journal of Emerging Market Finance

(Table 5 continued)

Variable Coefficient Standard Error T-statistic Significance

q2,1 2.8033e-003 2.6414e-003 1.06130 0.28855258
q2,2 -0.0377*** 0.0196 -1.92192 0.05461572
q2,3 -9.1427e-003* 1.3982e-003 -6.53900 0.00000000
q3,0 5.7742e-004* 2.2093e-004 2.61361 0.00895925
q3,1 0.0243 0.0262 0.92598 0.35445495
q3,2 0.0462 0.0697 0.66348 0.50702498
q3,3 0.0539* 0.0183 2.94404 0.00323961
Parameters of Variance Equation††
w10 1.2571e-006* 2.1321e-007 5.89579 0.00000000
w20 1.1334e-007* 1.1827e-008 9.58358 0.00000000
w30 7.2982e-006* 1.0666e-006 6.84252 0.00000000
a11 0.1290* 0.0145 8.90355 0.00000000
a12 5.7372e-003 0.0214 0.26753 0.78906438
a13 3.8499e-003 4.6382e-003 0.83004 0.40651602
a21 -7.3496e-003 4.8808e-003 -1.50582 0.13211452
a22 0.4794* 0.0326 14.71962 0.00000000
a23 1.8949e-003 1.5156e-003 1.25021 0.21122369
a31 2.0964e-003 0.0160 0.13116 0.89564553
a32 0.0934** 0.0402 2.32042 0.02031818
a33 0.0514* 8.6833e-003 5.91445 0.00000000
b1 0.9023* 9.9759e-003 90.44525 0.00000000
b2 0.6905* 0.0137 50.33074 0.00000000
b3 0.8741* 0.0101 86.63173 0.00000000
d1 -0.0851* 0.0136 -6.23508 0.00000000
d2 -0.1128* 0.0330 -3.41795 0.00063095
d3 0.1125* 0.0167 6.73863 0.00000000
Parameters of DCC†††
a 0.0150* 5.1744e-003 2.89957 0.00373671
b 0.9798* 8.2653e-003 118.54137 0.00000000
Log likelihood = 43438.1740
Source: Authors’ own calculations.
Note: 1 represents bullion market, 2 represents foreign exchange market and 3 represents
Nifty.
Mean equation: R i, t = i i, 0 + | j i i, j R j, t - 1 + f i, t f i, t / } t - 1 ~N (0, H ii, t) .
†

††
Variance equation: H ii, t = ~ i0 + | j a ij f j2, t - 1 + b i H ii, t - 1 + d j f j2, t - 1 I f 1 0 (f j, t - 1) and
†††
Hij,t = DtRtDt, where Dt = diag ( h 11, t , h 22, t , h 33, t ) and R t = diag (s-11,1/2t , s-22,1/2t , s-33,1/2t )
S t diag (s11,
-1/2 -1/2 -1/2 r
t , s 22, t , s 33, t ) , where S t = (1 - a - b) S + a u t - 1 u t - 1 / + b S t - 1

*, ** and *** indicate significance of the parameter at 1%, 5% and 10% levels, respectively.
Nandy and Chattopadhyay 23

market are reported here. Here i, j = 1, 2, 3, where 1 represents gold bul-

lion, 2 represents exchange rate and 3 represents Nifty. The values of the
coefficients qi,j in the mean equation show that each of the three domes-
tic markets are by and large autoregressive, though only for the foreign
exchange market q2,3 is found to be statistically significant which indicates
that there is influence of the return of the stock market in the previous
period on the current period return of the foreign exchange market. It
is observed in the variance equation that bi < 1 for all the three markets
indicating that variances are finite and volatilities are persistent in nature.
The scalar parameters ‘a’ and ‘b’ are found to be significantly positive
and less than one (a + b = 0.9948) satisfying the condition of positive
definiteness of the time dependent conditional correlation matrix" t. It can
also be seen from Table 5 that among the parameters aij for i ≠ j, only a32
is statistically significant (at 5% level) and coupled with it the significant
negative value of d2 (significant at 1% level) imply that negative residuals
(bad news) in foreign exchange market has lesser impact on the volatility
of the stock market compared to the effects of the positive residuals, that
is, there is asymmetric volatility spillover from foreign exchange market
to the stock market. There is no evidence of significant spillover from the
gold bullion market and the stock market to other markets.
While examining the presence of asymmetric volatility spillover in
DCC-MV-TARCH (1, 1) framework between Nifty, gold bullion, foreign
exchange rate and CMR together [the results are not shown here to save
space] for different study period, both way volatility spillovers between
the stock and foreign exchange markets are observed though the volatility
spillover is found to be asymmetric one only from the stock market to the
foreign exchange market. We also observe significant asymmetric volatility
spillover from the stock market to the bullion market but no significant
spillover is observed between the stock market and the money market.
When the DCC-MV-TARCH (1, 1) model is estimated with gold bul-
lion, foreign exchange, stock market and daily gross volume of FII trade
(the results are not shown here to economise space) for different study
period, as already mentioned, we find evidence of significant asymmetric
volatility spillover from the domestic stock market return to change in
gross volume of FII trade and return in bullion market. Significant volatility
spillover from the foreign exchange market to the stock market is again
observed here, though it is not found to be asymmetric.
After observing the existence of significant asymmetric volatility
spillover between the domestic stock market and the foreign exchange
24 Journal of Emerging Market Finance

Table 6. Maximum Likelihood Estimate of DCC-MV-TARCH (1, 1) Model for

Volatility Spillover Across Domestic Stock Market, Asian Stock Market, World
Stock Market and Foreign Exchange Market

Variable Coefficient Standard Error T-statistic Significance

Parameters of mean equation†
q1,0 5.4354e-004** 2.1110e-004 2.57477 0.01003063
q1,1 0.0440* 0.0168 2.62188 0.00874450
q1,2 -0.0369** 0.0150 -2.45876 0.01394172
q1,3 0.2190* 0.0170 12.90782 0.00000000
q1,4 0.0795 0.0617 1.28829 0.19764388
q2,0 -2.0838e-004 1.8102e-004 -1.15111 0.24968726
q2,1 0.0334* 0.0110 3.03071 0.00243983
q2,2 -0.0688* 0.0162 -4.24635 0.00002173
q2,3 0.4279* 0.0142 30.20090 0.00000000
q2,4 0.0200 0.0534 0.37451 0.70802802
q3,0 1.8306e-004 1.5190e-004 1.20511 0.22815969
q3,1 6.0515e-003 8.6994e-003 0.69562 0.48666664
q3,2 -4.1034e-003 0.0108 -0.38036 0.70367598
q3,3 -0.0571* 0.0178 -3.20038 0.00137244
q3,4 0.0507 0.0469 1.08106 0.27967003
q4,0 -2.0301e-006 1.9267e-005 -0.10537 0.91608604
q4,1 -0.0102* 5.9594e-004 -17.06761 0.00000000
q4,2 2.6831e-003** 1.1532e-003 2.32657 0.01998831
q4,3 -8.0930e-003* 1.1392e-003 -7.10428 0.00000000
q4,4 -0.0415** 0.0169 -2.45883 0.01393905
Parameters of Variance Equation ††
w10 7.1628e-006* 7.4667e-007 9.59296 0.00000000
w20 4.0485e-006* 5.3131e-007 7.61977 0.00000000
w30 2.0994e-006* 2.1086e-007 9.95681 0.00000000
w40 9.1659e-008* 6.5795e-009 13.93102 0.00000000
a11 0.0498* 6.8984e-003 7.21436 0.00000000
a12 -0.0469* 8.4497e-003 -5.55316 0.00000003
a13 0.0344* 9.1758e-003 3.74611 0.00017960
a14 0.1191* 0.0370 3.22109 0.00127702
a21 0.0147** 6.2145e-003 2.36853 0.01785911
a22 0.0281* 7.0555e-003 3.98342 0.00006793
a23 0.0131*** 6.7831e-003 1.93376 0.05314241
a24 0.0154 0.0258 0.59832 0.54962913
a31 1.2312e-003 3.6229e-003 0.33984 0.73397337
a32 -0.0152** 5.9111e-003 -2.57441 0.01004111
a33 -0.0150* 5.6233e-003 -2.66031 0.00780688
a34 0.0205 0.0206 0.99864 0.31797032
a41 3.0912e-004 7.0190e-004 0.44040 0.65964458
Nandy and Chattopadhyay 25

Variable Coefficient Standard Error T-statistic Significance

a42 -2.0858e- 1.1556e-003 -1.80493 0.07108608
003***
a43 0.0118* 2.0055e-003 5.85959 0.00000000
a44 0.4973* 0.0172 28.84107 0.00000000
b1 0.8792* 6.7586e-003 130.08791 0.00000000
b2 0.8938* 6.2860e-003 142.19352 0.00000000
b3 0.9218* 5.9141e-003 155.86060 0.00000000
b4 0.6876* 5.9124e-003 116.29078 0.00000000
d1 0.1108* 0.0112 9.92689 0.00000000
d2 0.1043* 0.0111 9.35252 0.00000000
d3 0.1608* 9.5625e-003 16.81180 0.00000000
d4 -0.1014* 0.0214 -4.73570 0.00000218
Parameters of DCC†††
a 3.6721e-003* 6.2539e-004 5.87162 0.00000000
b 0.9960* 7.1662e-004 1389.91733 0.00000000
Log likelihood 54438.6562
Source: Authors’ own calculations.
Note: 1 represents domestic stock market, 2 represents Asian stock market, 3 represents
World stock market and 4 represents foreign exchange market.
Mean equation: R i, t = i i, 0 + | j i i, j R j, t - 1 + f i, t f i, t / } t - 1 ~N (0, H ii, t);
†

††
Variance equation: H ii, t = ~ i0 + | j a ij f j2, t - 1 + b i H ii, t - 1 + d j f j2, t - 1 I f 1 0 (f j, t - 1) and
†††
Hij,t = DtRtDt, where Dt = diag ( h 11, t , h 22, t , h 33, t ) and R t = diag (s-11,1/2t , s-22,1/2t , s-33,1/2t )
S t diag (s11,
-1/2 -1/2 -1/2 r
t , s 22, t , s 33, t ) , where S t = (1 - a - b) S + a u t - 1 u t - 1 + b S t - 1 $.
/

*, ** and ***) indicate significance of the parameter at 1%, 5% and 10% levels, respectively.

market, now we also want to examine the asymmetric volatility spillover

between the domestic stock market and global stock markets comprising
a regional stock market represented by Nikkei and rest of the world stock
market represented by S&P 500 along with the foreign exchange market.
Here i, j = 1, 2, 3, 4 where 1 represents Nifty, 2 represents Nikkei, 3 rep-
resents S&P 500 and 4 represents exchange rate. The DCC-MV-TARCH
(1, 1) model estimation for the global and domestic stock markets and
the foreign exchange market together is done using Berndt–Hall–Hall–
Hausman (BHHH) algorithm. The results of this estimation are presented
in Table 6. We find significant a12 and a21 along with significantly positive
d1 and d2 here which imply the existence of both way significant asym-
metric volatility spillovers between the domestic and Asian stock markets.
Significant a13 and a14 along with significantly positive d3 and significant
negative d4 in the estimated result indicate the presence of asymmetric
26 Journal of Emerging Market Finance

volatility spillovers from the world stock and foreign exchange markets to
the domestic stock market. Thus, while examining the volatility spillover
relation among the domestic, Asian and world stock markets along with
the foreign exchange market both way significant asymmetric volatility
spillovers between the domestic stock market and the Asian stock market is
evidenced and there are also evidences of significant asymmetric volatility
spillovers from the world stock market and the foreign exchange market
to the domestic stock market.

8. Concluding Remarks
This article modestly tries to examine interdependence between Indian
stock market and different other components of domestic financial system,
namely, foreign exchange market, bullion market, money market and also
gross volume of FII trade and foreign stock markets comprising a regional
one (represented by Nikkei of Japan) and other for the rest of the world
(represented by S&P 500 of the USA). Attempts are also made to examine
asymmetric volatility spillover first, between the Indian stock market and
other domestic financial markets and second between the Indian stock
market and global stock markets represented by Nikkei and S&P 500
along with the foreign exchange market. To measure linear interdepend-
ence among multiple time series of financial markets multivariate VAR
analysis, Granger causality test, impulse response function and variance
decomposition techniques are used. DCC-MV-TARCH (1, 1) model is
applied for estimating the volatility spillover relation between the afore-
mentioned markets considering daily data for a relatively longer period
of time from 1 April 1996 to 31 March 2012. The results of multivariate
VAR analysis, Granger causality test, variance decomposition and impulse
response function establish significant interdependence between domestic
stock market and different other financial markets in India and abroad.
The results of DCC-MV-TARCH (1, 1) model estimation show significant
asymmetric volatility spillover between the domestic stock market and
the foreign exchange market and also from the domestic stock market to
bullion market and changes in gross volume of FII trade. We also find both
way asymmetric volatility spillovers between the domestic stock market
and the Asian stock market whereas it is found to be one way from the
world stock market to the domestic stock market. The results do not show
any evidence of volatility spillover between the domestic stock market
and the money market.
Nandy and Chattopadhyay 27

The findings of the study have much practical significance. For instance,
as the volatility of the US stock market is found to be spilled over to the
Indian stock market significantly in our study, the Indian regulators in
response to any US event (say, insolvency of Lehman Brothers) must be
watchful and ready to take appropriate steps to lessen its volatility enhanc-
ing impact. The findings on volatility transmission among the financial
markets may also provide international portfolio managers, speculators as
well as hedgers in protecting their interest through enhanced informational
efficiency in markets which are integrated with their spillover effects.
Nevertheless, the conclusions of the study are based on analysis of data
of select domestic and foreign financial markets and therefore the results
may vary for other set of markets. Moreover, the study has to depend on
secondary sources of official data whose inherent limitations cannot be
avoided. There is further scope of research in comparing the volatility
spillovers among the domestic and foreign financial markets prior and
following the global financial meltdown of 2007–2008 using high
frequency intraday data instead of daily data.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research,
authorship and/or publication of this article.

Funding
The authors received no financial support for the research, authorship and/or
publication of this article.

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