Return and volatility connectedness across China, Japan, and Korea stock markets: Evidence from the R2 decomposed connectedness approach

Employing the [Formula: see text] decomposed connectedness approach, we investigate the return and volatility propagation mechanism across the Chinese, Japanese, and Korean stock markets. This framework allows us to efficiently decompose connectedness measures into contemporaneous and lagged components. We find that the stock markets of China, Japan, and Korea have strong overall and contemporaneous connectedness effects, but the lagged connectedness is relatively weak. The return connectedness is stronger than the volatility connectedness. The return connectedness and volatility connectedness among the four stock markets exhibit heterogeneity and are time-varying. Different stock markets simultaneously play the roles of risk transmitters and receivers, with the Hang Seng Index being the largest mean net spillover. At the same time, the KOSPI Index has the largest volatility net spillover. The Hang Seng Index has the greatest influence on both return spillover and volatility spillover. After the outbreak of three extreme events, namely, China’s stock market disaster, the global COVID-19, and Russia–Ukraine war, the connectedness between China, Japan, and Korea’s stock markets has significantly increased. This study has several implications for financial market regulatory authorities and investors.