International Financial Integration: Stock return linkage and volatility transmission

between Vietnam and other advanced countries.

Xuan Vinh Vo
University of Economics Ho Chi Minh City and CFVG Ho Chi Minh City
59C Nguyen Dinh Chieu Street, District 3, Ho Chi Minh City
Tel: (84 8) 38 551 776 - Fax: (84 8) 38 551 776
Email: vinhvx@ueh.edu.vn

Craig Ellis
University of Western Sydney
Locked Bag 1797 - Penrith NSW 2751
Phone: +61 2 9685 9462 - Fax: + 61 2 9685 9400
Email: c.ellis@uws.edu.au

Abstract

This paper investigates the interdependence between the Vietnamese stock market and other
influential stock markets in terms of return linkage and volatility transmission covering the
period including pre, during and post the 2008 Global Financial Crisis. A VAR model is used
to estimate the conditional return linkage amongst these indices and a GARCH-BEKK model
is employed to investigate the volatility transmission. We find evidence of statistically
significant correlation, return spillover and volatility linkage between Vietnamese stock market
with other leading stock markets of the US, Hong Kong and Japan. Moreover, we find that
during the financial crisis, stock markets become more interrelated.

Keywords: Stock market linkage, Volatility transmission, VAR-GARCH, BEKK-GARCH.

JEL Classification Code: F02, F21, F3, F4

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 International Financial Integration: Stock return linkage and volatility transmission
between Vietnam and other advanced countries.

1. Introduction

The globalization of financial markets becomes an evident trend worldwide. Domestic equity
markets are becoming more globalized because of the increased presence of foreign investors,
development of technology and the removal of cross-border capital flow restrictions in most
countries. Emerging equity markets have been an important destination for foreign portfolio
investors seeking to obtain diversification benefits. In addition, the low interest rate in their
home countries since the financial crisis is another factor driving investors to look for higher
rate of return in these markets. This increased international financial integration highlights the
importance of a clear understanding and predicting the stock return linkage and volatility
transmission amongst stock markets worldwide. Specially, volatility transmission among
international markets is highly relevant to investors since they have to constantly monitor and
assess changes in stock market linkages in order to reap the portfolio diversification and risk
sharing benefits (Jung & Maderitsch 2014).

This study investigates the linkage between Vietnamese equity market and other influential
equity markets (the US, Hong Kong and Japan). More importantly, we address the stock return
linkage and volatility transmission between these countries. Particularly, we investigate these
issues covering Vietnam and other influential stock markets over quite an extended time frame.
In this study, we employ VAR and bivariate BEKK-GARCH model to investigate the returns
spillovers and volatility linkage. Since the structural breaks tends to be a problem in GARCH
analysis (Ewing & Malik 2016), we divide our data sample into three sub-periods to take into
account of the Global Financial Crisis including: the pre-crisis period 37 July 2000 to 31
December 2007; the crisis period from 1 January 2008 to 31 December 2009; and the post-
crisis period 1 January 2010 to 30 June 2015.

Our first motivation for this study is the increase in common economic activities amongst the
countries in our data sample. Specially, there are clear potential linkages between Vietnam
equity market and other advanced stock markets. Firstly, the US stock market is the world
dominating market and it is commonly agreed that the US stock market strongly influence stock
markets worldwide. Moreover, Hong Kong and Japan are regarded as the two important

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financial hubs in Asia and these equity markets certainly play an influential role in the regional
economy.

Another motivation is the increased importance of emerging markets in general and Vietnam
market in particular. Accordingly, global investors are more interested in these markets and
they tend to tilt their portfolios towards emerging markets. Two important advantages of
emerging markets are their higher returns and potential diversification benefits for international
investors. Given the higher level of international diversification, stock returns and volatility
transmission are important because changes in equity variance affect optimal investment
strategy and diversification (Yong Fu et al. 2011). This is even more important in the context
of emerging markets due to its excessive volatility in nature. However, papers concerning the
emerging markets context seem to be limited in the current literature. Particularly, Vietnamese
stock market was formed more than 15 years ago and still far behind the developed world in
many aspects. However, there is an increasing volume of foreign portfolio investment in this
market demonstrating the attractiveness of Vietnam stock market to global investors (Alethea
et al. 2012; Batten & Vo 2014, 2015; Vo 2015).

Moreover, the increased presence of foreign investors in the domestic market is expected to
promote higher integration of Vietnam market into the global financial markets. Despite the
increased trend of international financial integration in practice, there have been relatively light
volume of research in the literature addressing the linkage between the Vietnamese equity
market and other international equity markets. This work is important in the sense that this is
one of the very few papers in the previous literature examining the linkage between Vietnamese
stock market and other stock markets. Notably, further insight into this market would be useful
for portfolio managers and investors worldwide.

Importantly, another strong motivation is the empirical approach adopted in the current paper.
We opt to use the VAR-GARCH approach since it has particularly received a strong interest
from a huge volume of papers modelling financial volatility (Arouri et al. 2012). More
specially, in this article, we investigate the stock returns and volatility linkages between
Vietnam and other influential stock markets. Another important advantage is that this approach
allows us to analyze the spillover effects in both returns and conditional volatility (Ling &
McAleer 2003). Moreover, this approach also enables us to measure the cross-market volatility
spillovers as effects of the realized volatilities in one market onto the realized volatilities of the
3

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chronologically following markets (Jung & Maderitsch 2014). A number of influential papers
have adopted this approach in studying volatility spillovers (Hamao et al. 1990; Lin et al. 1994;
Susmel & Engle 1994).

Our study has relevant implications to different stakeholders. Firstly, a thorough understanding
stock volatility is important since volatility reflects the uncertainty in the stock markets.
Volatility also reflects the stock market participants’ perception of risk. Secondly, a clear
understanding of stock market volatility and stock market mechanism is the solid foundation
for the formulation of a sound investment policy for portfolio managers. Our study also offers
insights on the international diversification strategies and potential gains from cross-border
hedging. Importantly, constant monitoring of stock market linkage is important for the
international investors seeking to diversify their portfolio globally. Thirdly, policy makers have
strong interest in understanding stock volatility spillovers because it plays an increased
important role since the global finance crisis.

The remainder of this paper is organized as follows. Section 2 gives a brief and critical review
of existing literature review on this topic. Section 3 continues with a comprehensive description
of the data and methodology. The empirical results are presented and discussed in section 4.
Finally, section 5 provides some conclusions based on our findings.

2. Literature review

One of the indicators to proxy for international financial integration is the returns and volatility
correlations and linkage amongst global stock indices in the current literature (Vo 2009).
Moreover, the trend of increased global financial integration reflects the demand for constant
monitoring and assessing the changes in global market linkages. Volatility transmission is
regarded as a central issue in examining the spillovers of uncertainty and valuation among
market participants (Jung & Maderitsch 2014). A thorough understanding of these linkages is
also important in the sense of international portfolio diversification benefits. More importantly,
the recent financial crises highlight the importance to investigate the nature of the
interdependence of the international financial markets in terms of return and volatility
spillovers.

A large number of papers focus on examining the volatility transmission between different
equity markets around the globe. These papers typically report significant and substantial cross-
4

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market volatility spillovers among international stock markets as a result of increased
international financial integration (Dimpfl & Jung 2012; Jung & Maderitsch 2014). For
example, Eun & Shim (1989) investigate the international transmission of stock market
movements between developed markets. This study reports a substantial amount of multi-
lateral interaction between different national stock markets.

Regarding volatility spillover during financial crisis, King & Wadhwani (1990) construct a
model in which ‘contagion’ between markets occurred as a result of attempts by rational agents
to model imperfect information from price changes in other markets. Focusing on the October
1987 stock market crash, this paper finds strong evidence of volatility induced contagion
between the London and New York stock markets. Similarly, Hamao et al. (1990) present
supporting evidence of price volatility spillovers between the London, New York and Tokyo
stock markets during the October 1987 crash. However, this paper presents weaker evidence
of spillovers in the pre-October crash period. Accordingly, Chelley-Steeley (2000) examines
the stock volatility linkages between major equity markets in Europe, Japan, the US and UK
and finds that the correlation between the conditional variances of the markets has increased
substantially over the last two decades.

Singh et al. (2010) assess price and volatility spillovers across a large number of international
stock markets and conclude that whilst the US equity market influences most other markets,
the emerging markets in the sample also affect some developed markets. Similarly, Lin et al.
(1994) examine how returns and volatilities of stock indices are correlated between the Tokyo
and New York markets and report a clear link between these equity markets. Particularly, the
paper indicates that the information revealed in one market has a global impact on the returns
of the other market. However, Susmel & Engle (1994) present evidence indicating that
volatility spillovers between New York and London markets is minimal and have a duration
which lasts only an hour or so. The volatility spillover effects are most significant surround the
movement of share prices around the New York opening, but these results are not strong.

In the context of Asian equity markets, the growing role of Asian financial markets in the global
economy has recently attracted much attention from economists to examine the issue of
transmission of volatility shocks within the Asian region and beyond (Sin 2013; He et al. 2015;
Rughoo & You 2015; Yarovaya et al. 2016). For example, Johnson & Soenen (2002)
investigate the integration of 12 equity markets in Asia and Australasia with Japan.
Incorporating an analysis of macroeconomic variables, they find that the stock markets in their

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sample are highly integrated with Japan. Notably, these markets become more integrated over
time. In a similar vein, Tatsuyoshi (2003) examines the magnitude of return and volatility
spillovers from Japan and the US to seven Asian equity markets, finding that while the US
equity market is dominant in influencing Asian market returns, the volatility of the Asian
market is more heavily influenced by Japanese market than by the US market. The significant
role of Japanese equity market in transmitting volatility to other East Asian equity markets is
confirmed by Chuang, Lu and Tswei (2007).

Giampiero & Edoardo (2008) provide evidence of significant volatility spillovers amongst
Hong Kong, Korea, Thailand, Malaysia and Singapore markets. Further, Lee (2009) models
volatility spillover effects among the stock markets of India, Hong Kong, South Korea, Japan,
Singapore and Taiwan. This paper reports statistically significant volatility spillover effects
within these stock markets. In the same context, Sariannidis et al. (2010) present similar results
using the data from India, Singapore and Hong Kong equity markets. Yarovaya et al. (2016)
demonstrate strong linkages between markets in the Asian region using the analysis of Asian
stock index futures markets.

Recognizing the growing influence of the Chinese economy on the region, Zhou et al. (2012)
report that after 2005, the Chinese stock market shows a significant volatility spillover effect
on other Asian, European and North American equity markets. More recently, Batten et al.
(2015) examine the degree of international financial integration using an asset pricing
framework with varying estimation lengths. Interestingly, the results indicate that there has
been an increasing degree of integration between Asian and international stock markets.
However, Batten et al. (2015) also point out that there is little evidence to establish the linkage
between Asian equity markets and Japan stock market.

In addition, a number of papers focus on the financial integration among developed and
emerging Asian markets as a signal for the increased importance of these markets. For example,
Worthington & Higgs (2004) state that while all Asian equity markets tend to be more
integrated, the spillovers from the developed to the emerging markets are clearly not
homogeneous across different emerging markets. Particularly, volatility spillovers resulting
from varying domestic conditions are generally more significant in emerging markets. More
recently, Li & Giles (2015) model the volatility spillovers as an indicator of international stock
market linkages between six developing Asian countries.

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Many papers in the current literature focus on addressing the effects of Global Financial Crisis
on international stock market linkages. For example, In et al. (2001) assert that Hong Kong
stock market plays a significant role in volatility transmission to other Asian markets in their
work concerning lead-lag relationships and volatility interactions between the equity markets
of Hong Kong, Korea, and Thailand. Despite finding almost no co-movement between the
equity markets of Thailand, Indonesia, Korea Japan, Hong Kong, Singapore and Taiwan, Jang
& Sul (2002) present uni-directional and bi-directional linkages increased sharply among these
countries’ equity markets since the 1997 Asian financial crisis.

Yilmaz (2010) explores the extent of contagion and interdependence across the East Asian
equity markets from the early 1990s. This paper reports substantial time-variation in East Asian
return and volatility spillovers and a peak in interdependence relations during the Global
Financial Crisis. Moreover, this work also find that both the Asian crisis and Global Financial
Crisis result in a significant jump in the the stock return volatilities in Australia, Singapore, the
US and UK equity markets. Indika et al. (2010) present evidence of unilaternal volatiliy
spillovers from the US and UK to the smaller markets of Australia and and Singapore. This
work does not provide any significant evidence of an impact on returns arising from either
crises. Sang & Seong (2011) also report unidirectional volatility spillovers from the equity
markets of Hong Kong, Korea and Singapore to the Chinese markets pre-GFC period. As the
volatility of the Chinese stock market become more closely correlated with the other Asian
stock markets post crisis, this implies that the GFC in fact strengthens the integration of Chinese
stock market into Asian stock markets.

Despite the wealth of literature concerning equity market return and volatility transmissions –
particularly since the Asian Crisis and GFC – there remains very little in the Vietnamese market
context. The aims and the main contribution of this current study are to fill this gap.

3. Data and Methodology

Data
For each of the markets analyzed, we use the national stock market index data at daily
frequency. Particularly, the specific market indices representing each of the selected countries
in our data set include: Vietnam Stock Market Index (VN Index), the US S&P500 stock index,
Hong Kong - Hang Seng Index (HSI), and Japan-Nikkei 225 (N225).

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Data are collected from Bloomberg database. Our data sample ranges from 3 January 2000 to
30 June 2015 since the first stock exchange of Vietnam established in 2000. We use the daily
frequency of data to capture more information in the stock prices (Li & Giles 2015). However,
following the convention in the litature, we only take common trading days into account.
Holidays, weekends and other nontrading days are excluded. Further, we divide our dataset
into different subperiods covering the pre, during and post global financial crisis.

As the stock markets in our data sample are located in different time zones, we particularly pay
attention to the time difference in our analysis by considering the market opening and closing
using the UTC time. This information is necessary to determine which indices would have
potential effects on which other indices in the same day or within next day. For example, the
Japanese Tokyo exchange opens and closes before the Ho Chi Minh City Stock exchange of
Vietnam so Japanese stock market would influence Vietnamese stock market in the same day.

Descriptive statistics of daily returns for each stock market index are presented in Table 1
below for the pre-crisis, during crisis and post-crisis periods respectively. In general, the mean
returns are highest in pre-crisis period, lowest in crisis period and then higher in post crisis
period. Of particular note is the mean returns during the crisis are significantly lower and
negative in all countries.

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Table 1 Descriptive statistics of Index returns

VIETNAM THE US HONGKONG JAPAN VIETNAM THE US HONGKONG JAPAN VIETNAM THE US HONGKONG JAPAN
Pre-Crisis During Crisis Post Crisis
Mean 0.0012 -0.0002 0.0002 0.0003 -0.0017 -0.0009 -0.0009 -0.0003 -0.0003 0.0001 -0.0006 0.0000
Median 0.0004 0.0006 0.0006 0.0003 0.0003 0.0007 -0.0005 0.0003 0.0003 0.0004 -0.0001 0.0006
Maximum 0.0869 0.0557 0.0543 0.0613 0.0463 0.0692 0.0918 0.0599 0.0393 0.0463 0.0359 0.0643
Minimum -0.0714 -0.0441 -0.0424 -0.0373 -0.0535 -0.0947 -0.0734 -0.1001 -0.0605 -0.0690 -0.0583 -0.0995
Std. Dev. 0.0155 0.0105 0.0112 0.0118 0.0228 0.0212 0.0238 0.0213 0.0123 0.0106 0.0116 0.0130
Skewness -0.0593 -0.0688 -0.0974 -0.0559 -0.0544 -0.4465 -0.0001 -0.5117 -0.4872 -0.5070 -0.4508 -0.9600
Kurtosis 7.0675 6.3733 5.0515 4.0800 2.3668 5.3621 3.8790 5.1064 4.5073 8.3742 4.7587 11.3835
Observations 798 797 798 798 259 259 259 259 688 688 688 688

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Methodology
In order to analyze the return spillovers across different stock markets, we employ the VAR
models to estimate the strength and sign of cross-correlation between returns. We utilize
bivariate VAR models with 2 lags to examine interrelationships between the returns of the
Vietnam market and other indices.
𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡 = ∝ + 𝛽1 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡−1 + 𝛽2 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡−2 + 𝛾1 𝑟𝑢𝑠,𝑡 + 𝜀𝑡
𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡 = ∝ + 𝛽1 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡−1 + 𝛽2 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡−2 + 𝛾1 𝑟𝐻𝑜𝑛𝑔𝐾𝑜𝑛𝑔,𝑡 + 𝜀𝑡
𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡 = ∝ + 𝛽1 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡−1 + 𝛽2 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡−2 + 𝛾1 𝑟𝐽𝑎𝑝𝑎𝑛,𝑡 + 𝜀𝑡

where 𝑟𝑣𝑖𝑒𝑡𝑛𝑎𝑚,𝑡 , 𝑟𝐻𝑜𝑛𝑔𝐾𝑜𝑛𝑔,𝑡 and 𝑟𝐽𝑎𝑝𝑎𝑛,𝑡 are the stock index returns of Vietnam, Hong Kong
and Japan respectively.

We further employ the diagonal presentation of the dynamic conditional model GARCH-
BEKK to estimate volatility spillovers between Vietnam and these influential equity markets.
This model allows for the estimation of volatility transmission among the stock markets in our
data sample. Likewise, the BEKK-GARCH framework has important advantages over other
GARCH based approaches (Yong Fu et al. 2011). More importantly, it is commonly accepted
that multivariate BEKK- GARCH specifications are more relevant than univariate models in
modelling volatility transmission between different stock markets (Arouri et al. 2012).

In the diagonal representation, the conditional variances are functions of their own lagged
values and own lagged squared returns shocks, while the conditional covariances are functions
of the lagged covariances and lagged cross-products of the corresponding returns shocks
(Chang et al. 2011).

4. Results and Discussion of Results

Integration amongst markets

We first run the correlation tests to examine the relationship amongst the markets in our sample.
Moreover, the correlation matrix also allows us to test whether the correlation is increasing
during and after crisis. Overall we observe that the correlation coefficients are higher during
the crisis period and the post-crisis in comparison with the pre-crisis period.

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Table 2 Correlation Matrix between Index Returns

VIETNAM THE US HONGKONG JAPAN

Pre-crisis
VIETNAM 1
THE US 0.1044 1
HONGKONG 0.0474 0.3507 1
JAPAN 0.1037 0.3195 0.5138 1
During Crisis
VIETNAM 1
THE US 0.2034 1
HONGKONG 0.1583 0.3646 1
JAPAN 0.1889 0.3576 0.5676 1
Post crisis
VIETNAM 1
THE US 0.2078 1
HONGKONG 0.2067 0.3731 1
JAPAN 0.1955 0.3064 0.5029 1
Whole period
VIETNAM 1
THE US 0.1660 1
HONGKONG 0.1304 0.3625 1
JAPAN 0.1889 0.3576 0.5676 1

Return Spillovers between Vietnam and other stock markets

The return spillovers are analyzed using the VAR model discussed in previous section.
Parameter estimates for the bivariate VAR during the pre-crisis, crisis, and post-crisis periods
respectively are reported in table 3 below.

Overall, we find that Vietnam stock market is strongly influenced by the advanced stock
markets in our data sample. This effect is maintained when we split our data sample into pre-
during and post global financial crisis. Particularly, we observe that the stock return linkage
between Vietnam and other stock markets seems to be stronger during and after global financial
crisis.

Our finding of return spillovers between Vietnam and other advanced stock market is consistent
with Johansson (2010) who finds an increasing level of financial market integration and high
levels of co-movement during times of international financial turmoil in East Asia and Europe.

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Similarly, Yilmaz (2010) shows that return spillovers in the East Asia region reached their
highest level during the global financial crisis.

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Table 3 Bivariate VAR model estimates - Vietnam and other indices

The US Hong Kong Japan The US Hong Kong Japan The US Hong Kong Japan The US Hong Kong Japan
Parameter

Pre Crisis During Post Crisis Whole

Crisis Sample

Vietnam (-1) 0.1714* 0.1715* 0.1734* 0.2936* 0.2990* 0.3185* 0.1279* 0.1214* 0.1282* 0.2029* 0.2038* 0.2076*
-0.0353 -0.0355 -0.0353 -0.0611 -0.0618 -0.0595 -0.0375 -0.0376 -0.0375 -0.0236 -0.0238 -0.0235
[ 4.85786] [ 4.83289] [ 4.91163] [ 4.80967] [ 4.84204] [ 5.35282] [ 3.41314] [ 3.23255] [ 3.41621] [ 8.59078] [ 8.57676] [ 8.83113]

Vietnam (-2) -0.0392 -0.0381 -0.0376 0.0338 0.0088 0.0047 0.0082 0.0196 0.0233 0.0011 -0.0034 -0.0002
-0.0353 -0.0354 -0.0353 -0.0613 -0.0618 -0.0594 -0.0374 -0.0375 -0.0376 -0.0236 -0.0238 -0.0235
[-1.11253] [-1.07592] [-1.06560] [ 0.55166] [ 0.14178] [ 0.07868] [ 0.21839] [ 0.52341] [ 0.61981] [ 0.04611] [-0.14366] [-0.01031]

Constant 0.0010 0.0010 0.0009 -0.0009 -0.0010 -0.0011 -0.0003 -0.0001 -0.0003 0.0001 0.0002 0.0001
-0.0005 -0.0005 -0.0005 -0.0013 -0.0014 -0.0013 -0.0005 -0.0005 -0.0005 -0.0004 -0.0004 -0.0004
[ 1.87213] [ 1.77813] [ 1.74213] [-0.69949] [-0.76465] [-0.81761] [-0.64590] [-0.31236] [-0.55336] [ 0.40813] [ 0.41917] [ 0.27396]

Index 0.1598* 0.0759 0.1434* 0.2331* 0.1615* 0.3322* 0.2342* 0.2100* 0.1822* 0.2072* 0.1485* 0.2174*
-0.0514 -0.0484 -0.0456 -0.0628 -0.0565 -0.0608 -0.0432 -0.0394 -0.0354 -0.0287 -0.0262 -0.0258
[ 3.10740] [ 1.56762] [ 3.14690] [ 3.71188] [ 2.85995] [ 5.46678] [ 5.42354] [ 5.32406] [ 5.15139] [ 7.23309] [ 5.66423] [ 8.44366]
* denotes significance at the 0.05 level

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Volatility Spillovers between Vietnam and other advanced stock markets
Volatility spillovers between Vietnam and other influential equity markets are investigated
using the dynamic conditional GARCH-BEKK model. In this diagonal representation, the
conditional variances are functions of their own lagged values and own lagged squared returns
shocks, while the conditional covariances are functions of the lagged covariances and lagged
cross-products of the corresponding returns shocks (Chang et al. 2011).

The estimates of the diagonal BEKK model are presented in table 4.

Table 4 Parameters estimates of diagonal BEKK model

Vietnam-the US Vietnam - Japan Vietnam – Hong Kong

Coefficient Prob. Coefficient Prob. Coefficient Prob.
M(1,1) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0006
M(2,2) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0348
A1(1,1) 0.5445 0.0000 0.5669 0.0000 0.4348 0.0000
A1(2,2) 0.2823 0.0000 0.2611 0.0000 0.1996 0.0000
B1(1,1) 0.8523 0.0000 0.8407 0.0000 0.8127 0.0000
B1(2,2) 0.9536 0.0000 0.9436 0.0000 0.9606 0.0000
* denotes significance at the conventional level (5%)

Table 4 shows that the estimates of ARCH and GARCH coefficients in the conditional variance
equations are statistically significant in most cases. Specially, our results indicate that the
volatility of Vietnam stock market is strongly dependent on past its own volatility shocks
(ARCH effects). Moreover, the relatively small size of ARCH coefficient estimates suggest
that conditional volatility is not likely to change very rapidly under the impulsions of returns
innovation.

However, the effects of the lagged value of conditional volatility of Vietnam stock returns on
future conditional variances (GARCH effects) are smaller suggesting a smaller impact of past
own volatility on the current conditional volatility. This finding highlights that the conditional
volatility of Vietnamese stock market is more likely to be affected by its own innovations than
its past volatility. The relatively large magnitude of GARCH coefficients indicate that the
conditional volatility is likely to fluctuate gradually over time.

In comparison of the effects between different markets, we find that the ARCH effects and the
GARCH effects are stronger in the US, Japan and Hong Kong equity market indices.
Particularly, we find that the GARCH effects are very highly persistent in these markets.

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Likewise, these results indicate that volatility of the US, Japan and Hong Kong markets affect
Vietnam stock market volatility.

5. Conclusion

The increasing globalization of financial markets has become an important trend in the last few
decades. Understanding the extent and nature of linkages amongst international equity markets
has been important for many different stakeholders (Li & Giles 2015). Further, understanding
the volatility transmission among international stock markets has practical implications in the
application of risk valuation and hedging strategies for international investors and portfolio
managers.

The ambiguity of the existing evidence on the direction of volatility transmission in the
previous literature is generally recognized (Yarovaya et al. 2016). This paper investigates
interdependence between Vietnamese stock market and other advanced stock markets in terms
of returns and volatility transmission. We use the stock market indices to analyze returns and
volatility linkage using a battery of econometric techniques for time series analysis. More
importantly, we analyze the linkages covering the period before, during and after the Global
Financial Crisis. Our results indicate Vietnam stock markets are influenced by the leading
world stock markets in terms of stock returns linkage and volatility linkage. Moreover, the
findings also suggest that these linkages are stronger during and after financial crisis.

An important implication from the findings of this paper is that international investors and
portfolio managers could take advantage of potential portfolio diversification benefits. All
these facts help increase the benefits of diversification and reduce the investment risk. On the
other side, the finding has relevant implications for policy makers in the context of emerging
markets. Particularly, the increase in volatility linkage is important since a small global market
shock might create excessive fluctuation in emerging markets. More importantly, emerging
markets are more vulnerable to global shocks. Moreover, the process of globalization and
financial liberalization is the outgoing trend to promote further international linkages.
Balancing between these trends remains the subject of debates for policy makers around the
world.

Acknowledgements

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Xuan Vinh Vo is grateful for financial support from University of Economics Ho Chi Minh
City in conducting this research. Any remaining errors are of course our own responsibility.

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