Volatility transmission and herding contagion during the global financial crisis

Mouna Boujelbène Abbes

International Journal of Managerial and Financial Accounting, 2013, vol. 5, issue 2, 138-161

Abstract: This study offers a new perspective on crisis transmission through an examination of herding contagion during 2008-global financial crisis across Asian and European financial markets. Using a bivariate GARCH-BEKK model, results show that the volatility of US stock market during the subprime crisis is significantly transmitted to Asian and European financial markets. Moreover, UK and Swiss financial markets present an important role in emitting volatility to Asian markets. In addition, Singapore constitutes the Asian channel through which crisis is transmitted across global equity markets. Using Kalman filter, residuals of index returns are estimated after controlling for macroeconomic-fundamentals and global shocks. All residuals showed enhanced volatility during the financial crisis period of mid 2007-2008. Moreover, the cross-country residual correlation between US markets and European and Asian markets increases in the turmoil period as compared to tranquil period. This finding is evidence of the presence of herding contagion in Asian and European markets during US crisis, and that can partly explains the severity of the crisis.

Keywords: financial crisis; spillover; herding contagion; volatility; BEKK-GARCH; Kalman filter; crisis transmission; stock markets; subprime crisis; USA; United States; Europe; Asia; financial markets; UK; United Kingdom; Switzerland; Singapore. (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:ids:injmfa:v:5:y:2013:i:2:p:138-161

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