Measuring return and volatility spillovers in euro area financial markets

Dimitrios Louzis

No 154, Working Papers from Bank of Greece

Abstract: This study examines the return (price) and volatility spillovers among the money, stock, foreign exchange and bond markets of the euro area, utilizing the forecast-error variance decomposition framework of a generalized VAR model proposed by Diebold and Yilmaz (2012) [Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 23, 57-66]. Our empirical results, based on a data set covering a twelve-year period (2000-2012), suggest a high level of total return and volatility spillover effects throughout the sample, indicating that, on average, more than the 50% of the forecast-error variance of the respective VAR model is explained by spillover effects. Moreover, the stock market is identified as the main transmitter of both return and volatility spillovers even during the current sovereign debt crisis. With the exception of the period 2011-2012, bonds of the periphery countries under financial support mechanisms are receivers of return spillovers, whereas, they transmit volatility spillovers to other markets diachronically. Finally, we identify the key role of money market in volatility transmission in the euro area during the outbreak of the global financial crisis.

Keywords: Asset markets; Spillovers; Vector Autoregressive; Euro area; Financial Crisis. (search for similar items in EconPapers)
JEL-codes: C53 G01 G10 G20 (search for similar items in EconPapers)
Pages: 38
Date: 2013-03
New Economics Papers: this item is included in nep-eec, nep-fmk, nep-for and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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