Integration between emerging market equity and global markets; is it fundamental or noisy? Evidence from wavelet denoised volatility spillover analysis in time and frequency domain

ABSTRACT

The study investigates the integration between the five largest emerging stock markets, Morgan Stanley Capital Emerging Market Index, and global financial markets like the US S&P 500, Brent Crude Oil and Dollar Index based on wavelet denoised volatility spillover in time and frequency domain using forecasted error variance decomposition framework. It is found that the impact of noise on the connectedness is more pronounced in the short run and declines in longer term. Further, long-term connectedness which is much higher than that of short-term connectedness confirms the existence of fundamental (noisy) concernedness in the long (short) term. The impact of noise both varies by time and frequency. The policy implications are discussed.

KEYWORDS:

• Volatility spillover
• wavelet denoising
• time and frequency domains
• emerging markets
• global markets
• US S&P 500

JEL CLASSIFICATION:

• C4
• C5
• C6
• Q02 Q03

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2022.2097183.

Notes

¹ The four largest countries by market capitalization weight in the MSCI-EM Index over 20 years (i.e. by 2020) are China, South Korea, Taiwan, and India. South Africa carries around the same level of weight as Brazil. And over the 20-year period, the importance of South Africa in the MSCI-EM Index has been increasing, while on the other hand, it is opposite for Brazil. That is why we have used South Africa as the fifth emerging market in our study.

² MSCI-EM Index futures is the most popular multi-country and multi-currency futures in terms traded value and open interest (using multi-country, multi-currency futures in portfolio management, MSCI). It started trading in 2009 as an individual asset class in the NYSE LIFE US futures exchange.

³ Measure of connectedness/integration is required for minimization of portfolio risk and optimal portfolio allocation Diebold and Yilmaz (2012).

⁴ Online Appendix 2 report Table 1 (Descriptive statistics) and Table 2 (Non-linearity test)..

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.