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The transmission of international stock market volatilities

Bruce Q. Budd ()
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Bruce Q. Budd: Dar Al-Hekma University

Journal of Economics and Finance, 2018, vol. 42, issue 1, 155-173

Abstract: Abstract This paper examines the spillover effects of cluster volatility between the equity markets of the U.S. and four Asia-Pacific countries in the context of two significant U.S. market crises (the financial crisis of 2007 and the threat of the U.S. government refusing to raise its “debt ceiling” and subsequently defaulting on its debt in 2011). The paper seeks to determine whether market crises in the U.S. and the increased volatility that they generate in the U.S. equity market, lead to similar increases in equity market volatilities in Asia-Pacific countries. Results from a VECH multivariate generalized autoregressive conditional heteroskedasticity GARCH specification model indicate that own-volatility clustering is evident in the analyzed sample, while cross-volatility clustering, has an economically smaller effect. The lags of both own- and cross-volatility show a significant explanatory power in the sample. The dummy coefficients of the two U.S. market crises are positive and significant, implying that volatility effects were exacerbated during the two sampled U.S. crisis periods. A series of second stage DCC-GARCH estimations are calculated between the five national stock exchange indices. Results show evidence of dynamic conditional correlation (integration) between the returns of the respective stock markets and the S&P500 Index during the crisis periods. These results are meaningful in the context of portfolio diversification and trade strategies within, and across markets. U.S. investors seeking the diversification benefits from foreign equity indices during crisis periods of high domestic market volatility may find those benefits diminished by linked patterns of stock price activity and increased market integration.

Keywords: Co-movement; GARCH; Spillovers; Structural break; Volatility (search for similar items in EconPapers)
JEL-codes: G15 F36 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:spr:jecfin:v:42:y:2018:i:1:d:10.1007_s12197-017-9391-0