EMU equity markets' return variance and spillover effects from the short-term interest rate

Ai Jun Hou

Quantitative Finance, 2013, vol. 13, issue 3, 451-470

Abstract: This paper examines the spillover effects from the short-term interest-rates market to equity markets within the Euro area. The empirical study is carried out by estimating an extended Markov-switching Glosten-Jagannathan-Runkle (GJR)-in-mean model with a Bayesian-based Markov Chain Monte Carlo methodology. The results indicate that stock markets in the Euro area display two significant regimes with distinct characteristics. Within a bear-market regime, stock returns have a negative relationship with volatility, and the volatility process responds asymmetrically to negative shocks to equity returns. The other regime appears to be a bull-market regime, within which the returns have a positive relationship with volatility, and volatility is lower and more persistent. We find also that there is a significant impact from fluctuations in short-term interest rates on the conditional variance and conditional returns in the Economic and Monetary Union countries. This impact is asymmetrical and appears to be stronger in bear markets and when interest rates change upward.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:13:y:2013:i:3:p:451-470

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DOI: 10.1080/14697688.2012.712211

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