This study seeks to analyse the return and volatility connectedness between public- and private-sector banks in India. Furthermore, it investigates the influence of uncertainty and risk factors on this connectedness.
This study used the daily closing prices of 10 public and 7 private-sector banks from April 1, 2008, to March 31, 2024, sourced from investing.com. The time-varying parameter vector autoregression model is applied to analyse return and volatility connectedness, while ordinary least squares and quantile regression are employed to examine the impact of risk and uncertainty factors.
The study's findings indicate that return spillovers exceed volatility spillovers. Further study results reveal that the State Bank of India (SBI) is a significant transmitter of return spillover, whereas City Union Bank acts as a lower transmitter and receiver. Additionally, the results show that Punjab National Bank is a larger transmitter of volatility spillover, while City Union Bank is the least active in this regard. Furthermore, the findings suggest that Domestic Economic Policy Uncertainty Index, Environmental, Social and Governance Uncertainty Index, Geopolitical Risk Index, Oil Price Uncertainty Index and the CBOE Volatility Index have a positive and significant influence on return connectedness, whereas Global Economic Policy Uncertainty Index has a negative effect.
The study's findings will help investors, managers and policymakers by highlighting cross-bank spillovers, enabling the development of hedging strategies, facilitating systemic risk monitoring and informing targeted regulatory interventions to strengthen portfolio construction and financial stability.
This study is the first to investigate the time-varying return and volatility connectedness between public- and private-sector banks in India. Unlike prior studies, it incorporates risk and uncertainty factors to uncover their asymmetric and quantile-dependent effects on systemic transmission dynamics.
