RESEARCH PROPOSAL

Submitted to Symbiosis International (Deemed University)

For

DOCTOR OF PHILOSOPHY
(Faculty of Management)

Adesh Doifode
(PRN 19029001045)

Under the Guidance of

Dr. Sonali Bhattacharya

Professor – Operations and Statistics
Symbiosis Centre for Management and Human Resource Development
Symbiosis International (Deemed University), Pune

and

Dr. Shailesh Rastogi, Co-Supervisor

Professor – Finance
Symbiosis Institute of Business Management
Symbiosis International (Deemed University), Pune

SYMBIOSIS INTERNATIONAL (DEEMED UNIVERSITY), Pune-412115

2020
 SYMBIOSIS INTERNATIONAL (DEEMED) UNIVERSITY

CERTIFICATE

Research Proposal entitled “Volatility Determinants of Global Equity Markets”

being submitted by Mr. Doifode Adesh Suryakant (PRN 19029001045) to the
Symbiosis International (Deemed University), Pune for the registration of a Ph.D.
Degree under the Faculty of Management has been prepared as per the guidelines
given by Symbiosis Centre for Research and Innovation.

Mr. Adesh Doifode

PRN 19029001045

Dr. Sonali Bhattacharya

Professor – SCMHRD

Dr. Shailesh Rastogi

Professor – SIBM

Date: 30th September 2020

Place: Pune
 VOLATILITY DETERMINANTS OF GLOBAL EQUITY MARKETS

1. INTRODUCTION

This study is an effort aiming to systematically examine the published literature

investigating the key factors causing volatility in global equity markets. The hypothesis
of volatility spillover is universal as it applies to all asset prices. Volatility in asset prices
generally shifts between different periods across various financial assets and stock
markets (Bauwens et al., 2006). Similarly, Mushinada & Veluri (2018) found that
overconfident investors having private information leads to excessive trading,
contributing to higher volatility. Thus, the study of volatility estimating models in
financial markets became imperative and drew the attention of industry professionals,
academicians, and policymakers significantly adding to the knowledge base over the
past four decades.

1.1 Concept of Volatility in Financial Markets

Volatility for a financial asset or a market index is a statistical computation of the

dispersion of its returns. The financial assets with high volatility are riskier but tend to
give higher returns, as established by previous researchers in different financial
markets. (Baillie & DeGennaro, 1990; Bali & Hovakimian, 2009; Jiang & Lee, 2006;
Kim et al., 2004; Li et al., 2005; Ludvigson & Ng, 2007; Malkiel & Xu, 1997; Poon &
Taylor, 1992; Shin, 2005). Variance and standard deviation are primarily used to
quantify the volatility of a financial security or an index. Volatility in stock markets is
commonly associated with significant fluctuations in asset prices over a period.
Studying volatility in financial securities has always been a complex and relatively
poorly understood area of research. Simply stated, volatility is a change in asset prices
over a specified period. The relatively steady price movement of a financial asset
indicates low volatility, while high volatility can be found in financial securities with
higher fluctuation in its prices, i.e. attaining new highs and drastic falls in a shorter
period. The volatility of a financial asset is a key element used to determine the prices
of options contracts.

Thus volatility is a measure of uncertainty or determination of financial risk associated

with the underlined financial asset. The higher spread in the asset prices means that
the financial security has high volatility for the given period. It also implies that the
asset price can swing substantially in any direction in future. Hence a low spread in
the asset prices means that the financial security has lower volatility for the given
period and its price will not fluctuate substantially in the subsequent period. The
volatility of a financial security can be quantified simply by calculating its percentage
returns (example: daily, weekly, monthly, annual, etc.). The historical prices of a
financial asset depict the extent of variability calculated as a change in percentage,
termed as historical volatility. Beta is also used as a relative measure of volatility of a
particular financial asset as compared with the movement in a relevant index for a
given period.

1.2 Framework for Identification of Past Literature

Empirical research papers related to volatility impact in global equities from diverse
publishers and journal databases were explored using the ‘Google Scholar’ search.
To identify the previous literature for review, ‘stock market’ and ‘volatility’ are the
keywords mainly searched simultaneously with crude, currency, gold,
cryptocurrencies, bond prices, and institutional flows in equity markets, which are
considered as significant volatility drivers in global equity markets. The research will
be focused on investigating the impact of the movement in major macroeconomic
variables influencing the volatility of stock indices in diverse developed and developing
economies (World Bank, 2019).

The foremost literature review conducted is targeted to investigate the past research
papers to identify the key determinants causing volatility in global equity markets and
also examines various financial econometric models developed to measure volatility.
In the past 40 years, various empirical models are evolved and established to
determine the volatility in global financial markets. Studies from reputed international
journals with high impact factor ranging between January 1980 and September 2020
were used to comprehend and decipher the previous progress in this area of research.
The search for past quality studies on “Volatility Determinants of Global Equity
Markets” resulted in a compilation of approximately 1000 research articles from
Australian Business Deans Council (ABDC) indexed journals. The methodology
proposed by Tranfield et al. (2003) is followed in this paper for a thorough and effective
structured review of literature on volatility drivers of global equity markets. The stages
involved in the review process are detailed in figure 1.
Figure 1. Structured literature review methodology approach

Defining the scope and objective of SLR

Stage 1
Investigating the evolvement of the literature concerned with volatility
in global equity markets

Search, screen and identify research papers

Stage 2
Preliminary filtering through keywords, journal quality assessment,
highly cited research papers,

Evaluation of selected research papers

Stage 3
Relevant to the scope of review, selecting from ABDC indexed
journals, data synthesis, and inferences

Summation of the literature gaps for future research

Stage 4 In-depth study of the selected research papers, classification of

literature as per theoretical constructs and findings, identifying
research gaps for future study

Using the above guidelines, the literature search was confined to 500 research
articles. These research papers were further examined for quality of study, suitability,
and relevance. Lastly, to the extent of our knowledge, the top hundred and fifty
research papers were identified for an elaborate review. Thus, the past literature on
the topic and methodologies used by the researchers were examined and detailed
investigation is carried out on around selected hundred and fifty research papers. The
following framework is used to further refine the extensive literature:

 Diversity in literature across various countries is ensured,

 Full-text peer-reviewed research papers,
 Preference towards GARCH models, and
 Highly cited research papers from Chartered Association of Business Schools
(CABS) and Australian Business Deans Council (ABDC) indexed journals were
considered for the study (Only A*, A and B category journals were considered).
2. LITERATURE REVIEW

Relationship between various major macro-economic variables i.e. crude, gold,

currency, government securities, interest rate, institutional flows, and inflation rate with
the stock markets, in the developed countries, has been a subject of empirical
research among academicians for many decades, with conflicting theoretical and
empirical findings. (Aboura & Chevallier, 2015; Aye et al., 2017; Chkili, 2016; Le &
Chang, 2016; Ewing & Malik, 2013; Hammoudeh & Yuan, 2008; Kim & Dilts, 2011;
Lee et al., 2012; Melvin & Sultan, 1990; Narayan et al., 2010; Raza et al., 2016;
Reboredo, 2013; Shahbaz et al. 2017; Šimáková, 2011; Tiwari & Sahadudheen, 2015;
Zhang & Wei, 2010). But, developing countries like India have been under-researched,
which is unusual considering India being the seventh-largest economy and one of the
largest importers of oil and gold. Some of the researches done in the Indian context
have given mixed results.  Jain and Biswal (2016) identified a direct relationship
between Sensex index with gold and crude prices, claiming fall in gold and crude
prices lead to a decrease in Sensex prices. Whereas, Singhal and Ghosh (2016)
detected no significant volatility spillover from oil prices to the Indian stock market. On
the contrary, Khalfaoui et al. (2015) and (Sarwar et al. (2020) concluded positive
volatility spillover from crude prices to the Sensex index. The volatility between
financial assets is implied but remains undetected, and thus it is estimated by
measuring its impact by investigating the asset prices (Andersen et al., 2003;
Barndorff-Nielsen & Shephard, 2005).

Traditionally investment in gold as a commodity is considered as a safe heaven and

the prices are always presumed to move up. Most of the risk-averse investors tend to
invest in gold as a hedge to reduce the impact of inflation on the value of money (Jaffe,
J. F. 1989). Melvin and Sultan (1990) also established a connection between gold and
crude, concluding political instability and crude price swings are significant factors
influencing gold price volatility. Likewise, volatility in crude price impacts the fluctuation
of equity prices in local markets, depending on the trend of the stock market (Sim and
Zhou, 2015). Steel prices are inter-linked primarily with crude and other commodities
including precious metals (Sarwar, Shahbaz, Anwar, & Tiwari, 2019). Whereas, it is
also an important market to be investigated for equity investments into various sectors.
Hence, a detailed examination is proposed to investigate the shock transmission and
volatility spillover between crude, gold, currency, government securities, interest rate,
institutional flows, and inflation rate with the global stock markets of diverse countries
at sector and firm level.
2.1 Evolution of Volatility Forecasting Models

Initially, the autoregressive (AR) technique was inducted by Yule (1926) to investigate
the relationship between the serial correlations found to be irrelevant in time-series
data. Consequently, the moving average (MA) propositions were introduced by Slutsky
(1937), while Wold (1938) connected the dots and formulated the ARMA approach for
modelling time-series data. The use of the ARMA time series model was a major
challenge until the data computing devices became economical in the early 1970s.

Using computer programs, Box & Jenkins (1970) published and disseminated the
applicability of ARMA techniques on stationary time-series data. Further, Box & Pierce
(1970) developed the popular ARIMA model by using the differenced data series, by
changing the variables to stationary at first level. ARIMA approach was subsequently
disputed by empirical findings (Fildes et al., 1998; Geurts & Ibrahim, 1975; Groff, 1973;
Huss, 1985; Makridakis et al., 1982; Makridakis & Hibon, 1979), using actual
information, with results confirming that the simpler techniques are equally or more
precise. Presently, the ARIMA technique is not considered appropriate for forecasting
time series data, where the degree of stochasticity is more and also lacks uniformity
in patterns and correlations.

Financial asset pricing, time-series data depicts a grouping of volatility and/or

autocorrelation across various periods. The use of more effective volatility predictors
was imperative, while to further advance several volatility estimators formulated by
Parkinson (1980). Thus, to investigate the conditional volatility, autoregressive
conditional heteroscedastic (ARCH) stochastic process is initially developed by Engle
(1982), differentiating between conditional and unconditional volatility. The ARCH
process is used by the author to estimate the averages and variances of inflation data
of the United Kingdom from 1958 to 1977. ARCH was further used in modelling
numerous diverse economic events (Engle, 1983; Engle et al., 1984; Engle & Kraft,
1983), where the multivariate regression model forecasts the current conditional
volatility using past information. Subsequently, Engle et al. (1987), initially in 1985,
extended the ARCH model by arguing that the conditional variance determines the
risk premium in the time series data, which was later applied by Domowitz & Hakkio
(1985) using currency data.

Generalised autoregressive conditional heteroscedasticity (GARCH) model was

presented by Bollerslev (1986) investigating the lagged conditional volatility. Likewise,
Taylor (1986) introduced stochastic volatility (SV) models and provided a framework
for time-based conditional volatility in asset prices. But Alizadeh et al. (2002), and
Chou (2005) argued that the GARCH and SV techniques lack accuracy and are
inefficient, as the volatility in asset prices during the day is completely ignored, and the
variance is predicted based on close prices. Further, Chou (2005) proposed a
conditional autoregressive range (CARR) model to estimate financial volatilities.
Alizadeh et al. (2002) also ascertained that the restricted dissemination of the log
series is almost Gaussian, thus enabling the likelihood estimation of SV methods. The
robustness in microstructure impact on Monte Carlo simulation is also confirmed by
Shu & Zhang (2006) by testing tick-by-tick data of the S&P 500 index from January
1995 to December 1999.

As of recent ARCH models are used to explain volatile variance in time-series data,
which is used as a pre-requisite for applying multivariate GARCH models. Presently,
various restricted GARCH versions are widely used to access the impact among
several time series variables. Multivariate volatility models such as Linear Diagonal
VEC Garch Model (DVEC) (Bollerslev et al., 1988), BEKK (1,1) (Baba, Engle, Kraft &
Kroner, 1990; Engle & Kroner, 1995), Constant Conditional Correlation (CCC)
(Bollerslev, 1990), Dynamic Conditional Correlation (DCC) (Engle, 2002) conditions
with robust covariances and conditional correlations are relatively more appropriate
when studying volatility spillovers and time-varying impact between various financial
asset prices (Arouri et al., 2011). Prominent GARCH methods currently used are
dynamic conditional correlation (DCC) model, the smooth transition conditional
correlation (STCC) GARCH model (Berben & Jansen, 2005), and the double smooth
transition conditional correlation (DSTCC) GARCH model proposed by (Silvennoinen
& Teräsvirta, 2009).

More effective models were developed over GARCH foundation viz. Vector
Autoregressive Moving Average–Generalized Autoregressive Conditional
Heteroskedasticity (VAR-GARCH Model) (Ling and McAleer, 2003) and VARMA-
Asymmetric GARCH Model (McAleer et al., 2009). VAR-GARCH model enables the
researchers to examine the conditional volatility of the asset prices along with the
conditional interlinkages and volatility spillover within the asset prices. It provides
adequate estimates of the variables with relatively low computational difficulty as
compared to the GO-GARCH model (Van der Weide, 2002) and the full factor GARCH
model of Vrontos et al. (2003). Additionally, optimal hedge ratios (Haigh and Holt,
2002) can be calculated for portfolio optimization and improvising hedging suitability.
2.2 Recent Literature on Volatility Determinants of Stock Markets
3. RESEARCH GAP

The impact of crude oil movements on global financial markets has been extensively
studied by the researchers over the past few decades. Whereas the inter-linkages
between major macroeconomic variables and global stock markets remain relatively
unexplored. Historically gold has always protected the economy from worsening
further during the financial crisis, wherein gold has reacted inversely quoting more
higher prices. Similarly, many oil-importing countries depend heavily on crude for its
usage in the manufacturing of goods, movement of goods & services and other oil-
related activities. As expected, the data related to crude production, prices, import,
etc. had been an area of interest of the researchers over the past few decades and is
one of the highly regulated and monitored economic factor.

Thus, a wide range of earlier studies has been carried out investigating the linkages
between crude oil and gold with global equities. Apart from crude oil and gold,
currency, government securities, interest rate, institutional flows, and inflation rate also
to be investigated for its impact on various global stock markets. Secondly, the
analysis will be done across various industries and also at the firm level, analysing and
interpreting the impact on heterogenous (large-cap, mid-cap, and small-cap)
companies.

3.1 Broader future scope of research which needs to be further investigated:

 Relationship between macroeconomic variables with stock markets from

developed and developing countries
 Change in relationship / impact before (2000-2007) and after (2012-2020)
global economic crisis with some of the countries
 Investigating the impact of major macroeconomic variables at sector and at firm
level across diverse countries
 Volatility impact between stock markets of developing and developed countries
 Volatility spillover between macroeconomic variables across different countries,
for e.g. Currency fluctuation on foreign trade, Currency fluctuation on
Institutional flows, etc.
3.2 Future Scope (Research Gaps) Highlighted Examining Recent Literature
4. RESEARCH QUESTIONS

 Do stock markets from developing and developed countries have the same
volatility impact due to fluctuation in major macroeconomic determinants?
 Which are the significant determinants of volatility of major stock markets
across the globe?
 Do global equities have volatility spillover to major macroeconomic variables?
 Whether the volatility impact is high or low in case of unforeseen economic
crisis?
 Do different macroeconomic variables have a contrary (direct and inverse)
influence in diverse stock markets?

5. OBJECTIVES OF THE STUDY

 To examine and establish the relationship between various major macro-

economic variables i.e. crude, gold, currency, government securities, interest
rate, institutional flows, and inflation rate with global stock markets.
 To determine the significant linkages in diverse stock markets considering two
different time zones (Global Crisis).
 To identify the significance of positive or negative volatility impact by major
macroeconomic determinants.
 To study the volatility spillover between various major macro-economic
variables sectoral equity indices across several countries
 To examine the firm-level volatility transmission pattern across large-cap, mid-
cap and small-cap companies

6. SCOPE OF THE STUDY

Variables to be studied: Major global equity indices and sectoral equity indices of
heterogeneous developed and developing countries, while macroeconomic variables
to be used for the research are crude, gold, currency, government securities, interest
rate, institutional flows, and the inflation rate.

Period of Study Proposed: Data for this research will be taken from January 1997 to
December 2020, mainly to apprehend the change in volatility impact between
macroeconomic variables and global stock markets before and after the global
financial crisis in 2008
Data: Data for all global equity indices, with nine listed companies representing each
industry (three companies each representing large-cap, mid-cap, and small-cap) will
be sourced from Bloomberg database. Daily data for other macroeconomic variables
used for research viz. crude, gold, currency, government securities, interest rate,
institutional flows, and the inflation rate will be sourced from the EIA website and
Bloomberg database.

Methodology to be used: DCC Garch, BEKK Garch, VARMA Garch, VAR-BEKK

Model (Methodology / Technique selection is discussed in detail in the below section)

Exclusions: The research will exclude the collection of any kind of primary data.

7. METHODOLOGY, TOOLS AND TECHNIQUES

Autoregressive conditional heteroscedasticity (ARCH) model (Engle, 1982) is base for

all the GARCH models and is relatively more popular among researchers investigating
volatility impact in asset prices. The variance in the error term is explained by the
ARCH model related to the error term in the prior period. The ARCH model is suitable
if an autoregressive (AR) model is used by the error variance of a time-series data.
While generalized autoregressive conditional heteroskedasticity (GARCH) model
(Bollerslev, 1986) is used if an autoregressive moving average (ARMA) model is
adopted for the error variance.

Asset price volatility can be more effectively forecasted using multivariate GARCH
models. The extensively practised ARCH and GARCH models have emerged as a
standard among the researchers for volatility estimation of optimal hedge ratios (OHR)
in time-varying asset prices, (Cecchetti et al., 1988; Baillie & Myers, 1991). While the
implementation of OHR in several kinds of research exhibits significant variability over
a period (Myers, 1991; Kroner & Sultan, 1993). Thus by stating the model equations
of conditional variance and covariance, the researchers have extensively used
multivariate GARCH models to investigate the time-varying correlation and covariance
across various macroeconomic variables and asset prices. 

Multivariate volatility models such as Linear Diagonal VEC Garch Model (DVEC)
(Bollerslev et al., 1988), BEKK (1,1) (Baba, Engle, Kraft & Kroner, 1990; Engle &
Kroner, 1995), Constant Conditional Correlation (CCC) (Bollerslev, 1990), Dynamic
Conditional Correlation (DCC) (Engle, 2002) conditions with robust covariances and
conditional correlations are relatively more appropriate when studying volatility
spillovers and time-varying impact between various financial asset prices (Arouri et al.,
2011). More effective models were developed over GARCH foundation viz. Vector
Autoregressive Moving Average–Generalized Autoregressive Conditional
Heteroskedasticity (VAR-GARCH Model) (Ling and McAleer, 2003) and VARMA-
Asymmetric GARCH Model (McAleer et al., 2009). VAR-GARCH model enables the
researchers to examine the conditional volatility of the asset prices along with the
conditional interlinkages and volatility spillover within the asset prices. It provides
adequate estimates of the variables with relatively low computational difficulty as
compared to the GO-GARCH model (Van der Weide, 2002) and the full factor GARCH
model of Vrontos et al. (2003). Additionally, optimal hedge ratios (Haigh and Holt,
2002) can be calculated for portfolio optimization and improvising hedging suitability.

Several recent empirical researches also affirm the superiority of multivariate GARCH
models (Agnolucci, 2009; Chang et al., 2011; Hammoudeh et al., 2009; Hassan &
Malik, 2007). These previous studies investigate the volatility spillover in asset prices
using bivariate GARCH models. Thus, subsequent studies (Salisu & Oloko, 2015;
Jouini & Harrathi, 2014) examined the volatility spillover across commodity markets
and other asset prices effectively by using BEKK model (Baba, Engle, Kraft & Kroner,
1990; Engle & Kroner, 1995). Portfolio optimization and computation of hedge ratios
give more practicality to these estimation models for an appropriate investment
decision by the investors in various financial assets and mainly while hedging using
derivatives. Hence it is justifiable and well established by previous researchers in the
area to use GARCH models.

For our analysis, we will be taking daily log-returns of all the variables. GARCH
(Generalized autoregressive conditional heteroscedasticity) model is used in this
research. GARCH model is considered more effective as compared to univariate
models mainly for testing time-series data (Sarwar, Shahbaz, Anwar, & Tiwari, 2019).
The technique used for examining the volatility spillover between the variables will be
BEKK-GARCH (1,1) (Baba, Engle, Kraft & Kroner, 1990; Engle & Kroner, 1995)
considering daily data having significant asymmetry and excess kurtosis with
autocorrelation and heteroskedasticity, which can be eliminated effectively using the
BEKK (1,1) model as per the previous review of the literature. Also, to uncover the
time-varying impact of the global financial crisis, the timeframe (data) used will be
divided by giving two structural breaks:
1. Pre-Financial Crisis
2. During the Financial Crisis
3. After Financial Crisis.

The above detailed investigation of methodologies to be used for time series analysis
will provide a direction to future researchers on deciding better volatility estimation
tools for different equity markets.

8. BENEFIT EXPECTED FROM RESEARCH OUTCOME:

The beneficiaries of this research output will be as follows:

 The management of impacting companies due to price movements in the above
mentioned macroeconomic variables can hedge and reduce their risk.

 This research can be used by policymakers/decision-makers as many countries

spend heavily on imports of oil, gold, etc. Macroeconomic variables can be
controlled by taking timely decisions by examining the interlinkages of these
major determinants of the stock market.

 Moreover, the findings will be valuable to the institutional investors (FIIs and DIIs)
as well as individual investors in decreasing the risks of their investments by
selecting industries and companies with a negligible or positive impact.

9. SCHEDULE OF PROPOSED WORK

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