Volatility Transmission Across Developed and Emerging Equity Markets: Evidence from Diebold–Yilmaz TVP-VAR Spillover Analysis of Volatility Indices

Abstract

Volatility indices have emerged as important forward-looking indicators of market uncertainty and investor sentiment. Understanding the transmission of volatility across global financial markets has become crucial in an increasingly interconnected financial system. This study examines the dynamic spillover effects among major global volatility indices and their corresponding stock markets across developed and emerging economies. The analysis covers twelve major markets—United States, United Kingdom, Germany, Hong Kong, Japan, Australia, South Korea, China, Taiwan, South Africa, India, and Brazil—over the period 2015–2025.

To capture the time-varying nature of volatility transmission, the study employs the Time-Varying Parameter Vector Autoregression (TVP-VAR) model combined with the Diebold–Yilmaz spillover framework based on generalized forecast error variance decomposition (FEVD). This methodology enables the measurement of total, directional, and net volatility spillovers across markets without imposing restrictive assumptions about variable ordering. The empirical results reveal substantial cross-market volatility transmission, confirming the presence of strong global financial linkages. The United States emerges as the dominant net transmitter of volatility shocks, highlighting the central role of the U.S. financial market in driving global risk dynamics. In contrast, emerging markets such as India, Brazil, South Africa, and Taiwan are identified as major net receivers of volatility shocks, indicating their higher susceptibility to external market disturbances.

Furthermore, the results show that volatility spillovers are strongly time-varying and intensify during periods of global financial stress, particularly during the COVID-19 pandemic and recent geopolitical tensions. These findings provide important implications for international investors, policymakers, and risk managers in understanding global financial contagion and portfolio diversification strategies. Overall, the study contributes to the literature by providing comprehensive evidence on the dynamics of volatility spillovers between global volatility indices and stock markets using a TVP-VAR spillover framework.