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Volatility spillover effects in European equity markets

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Author Info
Baele, L. (Tilburg University, Center for Economic Research)

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Abstract

This paper quanti/es the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and US market to 13 local European equity markets. I develop a shock spillover model that decomposes local unexpected returns into a country speciffic shock, a regional European shock, and a global shock from the US. The innovation of the model is that regime switches in the shock spillover parameters are accounted for. I find that these regime switches are both statistically and economically important. While both the EU and US shock spillover intensity has increased over the 1980s and 1990s, the rise is more pronounced for EU spillovers. For most countries, the largest increases in shock spillover intensity are situated in the second half of 1980s and the first half of the 1990s. Increased trade integration, equity market development, and low inflation are shown to have contributed to the increase in EU shock spillover intensity. Finally, I find some evidence for contagion from the US market to a number of local European equity markets during periods of high world market volatility.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 114.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:2003114

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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