Capturing volatility spillovers across national stock markets in Asia, Europe and the US

Abstract

The impact of the Global Financial Crisis 2007-2008 on international stock markets has generated considerable interest in the analysis of economic integration and stock market volatility spillovers. The topic is of particular interest to international portfolio managers deciding on their global investment strategies for portfolio diversification, as well as to policy makers implementing macro-economic policies to safeguard systemic stability. This study investigates the existence of volatility spillover effects across the globe by considering the returns of stock market indices in Asia, Europe and the United States between 2002 and 2017. Consequently, it then compares the results obtained under normal economic conditions with those obtained during GFC. The Study uses both VAR and Multivariate GARCH models. It uses variance decomposition from the VAR Models to investigate volatility connectedness between these markets, while it employs an unrestricted bivariate BEKK-GARCH(1,1) model to seek useful insight on the transmission of shocks and volatility spillover effects across markets. The results evidence that volatility spillovers are common across national stock markets, with the United States being the most influential player in the world economy. Additionally, the findings show weak integration between Asian and European markets, suggesting that Asian markets are relatively good hedging opportunities for European investors.