Return and Volatility Spillover Effects in Exchange Traded Funds (ETFs): A Cross-country Analysis

This study examines return and volatility spillover effects between exchange traded funds (ETFs) and indices of developed and emerging markets. Spillovers are defined as the transmission of impact across markets or market segments. There has been mounting evidence suggesting that ETFs transmit impact to their underlying assets, which can destabilize the markets. This issue becomes critical when combined with the meteoric rise of ETFs. The study employs univariate GARCH techniques and the multivariate GARCH model of diagonal BEKK to ascertain the existence and direction of return and volatility spillovers. The findings show that return as well as volatility spillover effects are present in both developed and emerging markets; however, developed market ETFs exert a stronger influence on the returns and volatility of their index in comparison with their emerging market counterparts. Bilateral co-volatility spillovers were found to be significant for all ETF–index pairs, which suggests that a high degree of correlation and interconnectedness exists between these two market segments. Cross-country analyses of ETF–index spillovers are practically non-existent. Such analyses are important to understand and compare ETF markets around the globe. The present study seeks to address this gap in research by investigating a diverse set of developed and emerging economies.