Volatility Spillovers Between BIST100 Index and S&P500 Index

Letife Özdemir and Serap Vurur

A chapter in Contemporary Issues in Behavioral Finance, 2019, vol. 101, pp 29-43 from Emerald Group Publishing Limited

Abstract: Capital markets thrive on information, and the information revolution has transformed these markets all over the world. Investors can now keep track of the movements of capital markets in real-time and they react to the flow of information from around the world. One of the concerns of stock market investors is whether the markets operate efficiently, independently, and with sound fundamentals. However, real market movements tend to exhibit a link as is evident from recent market movements across the world. The assessment of interdependence between stock markets is an important aspect of international portfolio management. The aim of this chapter is to examine the shock and volatility spillover between the Standard and Poor’s 500 (S&P500) index from the United States (US) Stock Exchange and the Istanbul Stock Exchange 100 (BIST100) index from the Stock Exchange Istanbul. S&P500 index, which is the most important index representing US markets, and BIST100 index, which is the index representing the Turkish market, were used as variables in this study. In the analysis, the causality in variance test was applied to determine the volatility spillover between these two markets. Later, multivariate GARCH (MGARCH) models were used to measure the volatility spillover in the markets. VAR(1)-GARCH (1,1)-Diagonal BEKK model was applied to the daily data to determine the shock and volatility spillover in the markets. As a result of the variance causality test, it was found that there is a bi-directional volatility spillover between S&P500 index and BIST100 index. When the return spillover between the markets is examined, a one-way spillover from the S&P500 index to the BIST100 index emerged. Diagonal BEKK model results show that each market is affected by its own news (unexpected shocks) and volatility. Furthermore, the volatility is persistent for both markets. These findings demonstrate that the US market and the Turkish market interact with each other.

Keywords: International financial markets; portfolio management; causality in variance test; volatility spillover; multivariate GARCH model; BEKK model; C22; G10; G15 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:csefzz:s1569-375920190000101003

DOI: 10.1108/S1569-375920190000101003

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