Volatility spillovers across equity markets: European evidence

This paper examines the issue of volatility spillovers across the three largest European stock markets, namely London, Frankfurt and Paris. The Exponential Generalized Autoregressive Conditional Heteroscedasticity model is used to capture potential asymmetric effects of innovations on volatility. During the period from 01/01/84 to 07/12/93, reciprocal spillovers are found to exist between London and Paris, and between Paris and Frankfurt, and unidirectional spillovers from London to Frankfurt. In almost all cases, spillovers are asymmetric in the sense that bad news in one market has a greater effect on the volatility of another market than good news. An analysis for the pre-crash (01/01/84 - 15/09/87) and post-crash (15/11/87 - 07/12/93) periods suggests that more spillovers and spillovers with higher intensity exist during the latter period. These findings suggest that these markets became more interdependent during the post-crash period.

[1]  Richard Roll.  Price volatility, international market links, and their implications for regulatory policies , 1989 .

[2]  G. Geoffrey Booth,et al.  Asymmetric volatility transmission in international stock markets , 1995 .

[3]  Cheol S. Eun,et al.  International Transmission of Stock Market Movements , 1989, Journal of Financial and Quantitative Analysis.

[4]  Liam A. Gallagher.  Interdependencies Among the Irish, British and German Stock Markets , 1995 .

[5]  M. Espitia,et al.  International diversification among the capital markets of the EEC , 1994 .

[6]  G. Andrew Karolyi,et al.  A Multivariate GARCH Model of International Transmissions of Stock Returns and Volatility: The Case of the United States and Canada , 1995 .

[7]  Jerold B. Warner,et al.  Private information, trading volume, and stock-return variances , 1990 .

[8]  B. Jeon,et al.  A system of stock prices in world stock exchanges: Common stochastic trends for 1975–1990 , 1991 .

[9]  Robert F. Engle,et al.  Stock Volatility and the Crash of '87: Discussion , 1990 .

[10]  K. French,et al.  Expected stock returns and volatility , 1987 .

[11]  Albert Corhay,et al.  STATISTICAL PROPERTIES OF DAILY RETURNS: EVIDENCE FROM EUROPEAN STOCK MARKETS , 1994 .

[12]  Panayiotis Theodossiou,et al.  Mean and Volatility Spillovers across Major National Stock Markets: Further Empirical Evidence , 1993 .

[13]  I. Mathur,et al.  Interdependencies among the Nordic and U.S. Stock Markets , 1990 .

[14]  J. Wooldridge,et al.  Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances , 1992 .

[15]  Robert F. Engle,et al.  Hourly volatility spillovers between international equity markets , 1994 .

[16]  James D. Hamilton.  Time Series Analysis , 1994 .

[17]  D. Power,et al.  An empirical investigation of convergence among European equity markets , 1994 .

[18]  Mark P. Taylor,et al.  The Internationalisation of Stock Markets and the Abolition of U.K. Exchange Control , 1989 .

[19]  A. Malliaris,et al.  The International Crash of October 1987: Causality Tests , 1992, Journal of Financial and Quantitative Analysis.

[20]  J. Urbain,et al.  Common stochastic trends in European stock markets , 1993 .

[21]  Daniel B. Nelson.  CONDITIONAL HETEROSKEDASTICITY IN ASSET RETURNS: A NEW APPROACH , 1991 .

[22]  Stephen L Taylor,et al.  Stock returns and volatility: An empirical study of the UK stock market , 1992 .

[23]  J. Madura,et al.  The impact of international listings on risk: Implications for capital market integration , 1990 .

[24]  Ronald W. Masulis,et al.  Correlations in Price Changes and Volatility Across International Stock Markets , 1990 .

[25]  T. Bollerslev,et al.  Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model , 1990 .

[26]  R. Chou,et al.  ARCH modeling in finance: A review of the theory and empirical evidence , 1992 .

[27]  Robert F. Engle,et al.  Common Volatility in International Equity Markets , 1993 .

[28]  Stephen R. Foerster,et al.  International Listings of Stocks: The Case of Canada and the U.S. , 1993 .

[29]  A. Christie,et al.  The stochastic behavior of common stock variances: value , 1982 .