Asymmetric connectedness of markets: How does the good and bad volatility spills over the US industries?
Abstract
There is an ample evidence that shocks to returns asymmetrically impact market volatility. Market volatility, especially in association with crisis development, may then spill quickly across different markets.
This paper considers that volatility spillovers might propagate differently from market to market with respect to positive or negative shocks. We combine the recent advances to capture such asymmetric volatility spillovers.
Specifically, we extend the computation of the Diebold Yilmaz spillover index by allowing for negative and positive changes in returns to be considered separately. As a result, by using negative realized semivariance (RS-)and positive realized semivariance (RS+) we devise a methodology which explains the transmission of downside and upside risk among markets.
The intra-market analysis of 30 U.S. stocks during 2004-2011 uncovers asymmetries between negative and positive volatility spillovers before, during, and after the financial crisis. Specifically, we show that volatility due to negative returns leads to larger spillovers than that from positive returns, especially during periods of increased uncertainty, while the opposite is evidenced especially during periods of economic growth.
In addition, we study the transmission mechanism among the industries and find interesting differences. Positive volatility tends to transmit with larger magnitude than the negative one for some industries, and asymmetric effects are generally much larger.
This leads us to the conclusion, that aggregating the spillovers smooths the asymmetric effects in risk transmission mechanism. Aggregated downside and upside systemic risk transmits in a comparable way, but the risk on disaggregated industry level is largely asymmetric, and positive/negative risk spills with different magnitudes.