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Abstract
The goal of the this paper is to investigate the shock spillover characteristics of the Russian stock market during different rounds of sanctions imposed as a reaction to Russia's alleged role in the Ukrainian crisis.
We consider six stock markets, represented by their respective stock indices, namely the US (DJIA), the UK (FTSE), the euro area (Euro Stoxx 50), Japan (Nikkei 225), China (SSE Composite) and Russia (RTS). Linking these markets together in a network on the basis of vector autoregressive processes, we can measure, among other things: (i) direct daily return and volatility spillovers from RTS to other market indices, (ii) daily propagation values quantifying the relative importance of the Russian stock market as a return or volatility shock propagator, and (iii) the amount of network repercussions after a shock. The last two are methodological innovations in this context.
It turns out that distinct spillover patterns exist in different rounds of sanctions. Largescale sanctions, beginning in July 2014, rendered the consequences of shocks from Russia less predictable. While these sanctions reduced the importance of the Russian stock market as a propagator of return shocks, they also increased its importance as a propagator of volatility shocks, thus making the network more vulnerable with respect to volatility shocks from the Russian stock market. This is a form of backlash that the sanctioning economies have been facing.
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1.Introduction
Russia's economy is of relatively moderate size in terms of aggregate figures. In 2013, Russia's GDP was around 2.8% of global GDP; the total value of Russia's stock market in 2012 was around 1.5% of the world stock market value.1 Russia's trading volume with the EU was approximately EUR 340 billion at that time2 and the EU's GDP was approximately EUR 13,500 billion.3 However, empirical studies have found evidence of strong dependence between Russia as one of the major raw* materials exporter along with its fellow BRIC (Brazil, Russia, India, China) country Brazil and the US markets, as well as a significant increase of connectedness among BRIC equity markets and with equity markets in the developed world beginning in 2005 (see Alou et al., 2011; Schmidbauer et al., 2013a). Bekiros (2014), investigating the spillover effects of the US financial crisis to the...