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Cross-Market Spillovers with 'Volatility Surprise'

Sofiane Aboura and Julien Chevallier
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Sofiane Aboura: DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique

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Abstract: This article adopts the asymmetric DCC with one exogenous variable (ADCCX) model developed by Vargas (2008), by updating the concept of ‘volatility surprise' to capture cross-market relationships. Current methods for measuring spillovers do not focus on volatility interactions, and neglect cross-effects between the conditional variances. This paper aims to fill this gap. The dataset includes four aggregate indices representing equities, bonds, foreign exchange rates and commodities from 1983 to 2013. The results provide strong evidence of spillover effects coming from the ‘volatility surprise' component across markets. Against the background of the recent financial crisis, the aim is to contribute to the literature on the interdependencies of financial markets, both in conditional means and (co)variances. In addition, asset management implications are derived.

Keywords: Cross-market relationships; Volatility surprise; Volatility spillover; ADCCX; Asset management; Crisis; Exchange Rate; Financial Market; Foreign Exchange (search for similar items in EconPapers)
Date: 2014
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01529770
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Published in Review of Financial Economics, Elsevier, 2014, 23 (4), pp.194-207. ⟨10.1016/j.rfe.2014.08.002⟩

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