Identifying Volatility Signals from Time-Varying Simultaneous Stock Market Interaction

Till Strohsal and Enzo Weber

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: In the academic literature, the economic interpretation of stock market volatility is inherently ambivalent, being considered an indicator of either information flow or uncertainty. We show in a stylized model economy that both views suggest volatility-dependent cross-market spillovers. If higher volatility in one market leads to higher (lower) reactions in another market, volatility reflects information (uncertainty). We introduce a simultaneous time-varying coefficient model, where structural ARCH-type variances serve two purposes: governing the time variation of spillovers and ensuring statistical identification. The model is applied to data of US and further stock markets. Indeed, we find strong nonlinear, volatility-dependent effects.

JEL-codes: C32 C58 G15 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-mst
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