Volatlity integraton of global stock markets with the Malaysian Stock Market: A multvariate GARCH approach

Abstract

The research studies short- and long-run volatility dynamics between Malaysia's stock market and 14 developed and developing major stock markets in the five different regions of America, Europe, Africa, Asia and Oceania. The paper uses three multvariate generalised autoregressive conditonal heteroscedastcity (MGARCH) models, namely, the Baba, Engle, Kraft and Kroner (BEKK) model; constant conditonal correlation (CCC) model; and the dynamic conditional correlation (DCC) model to examine volatility relationship of different stock markets to the Malaysian stock market. Findings show that the long-term volatlity relatonship of Malaysia's Kuala Lumpur Stock Exchange Index's volatlity with the UK's FTSE 100, Germany's DAX and France's CAC 40 found in the CCC and DCC models is a result of a long-term free trade agreement signed between Malaysia and the European countries. Unstable volatlity relatonship is found between Malaysia and China's stock markets. Similar situatons are observed in Malaysia's steady or unstable economic relatonships with the other countries stock markets, which can be either a product of strong trading and investng partnerships or politcal and social conflicts. The BEKK model confirms these volatlity spillovers, and concludes that volatlites are not only determined by their own lagged values, but cross-volatility spillovers from other countries also exist. Results show that most of the stock indices have significant spillover effects on the stock market of Malaysia, which confirms evidence of growing market integraton. In general, a study on volatlity transmission plays an important role in identfying vulnerabilites of certain stock markets against other markets, which helps in determining better investing decisions that can minimise losses, and can even improve returns depending on the hedged positon taken by the investor.