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Financial market spillovers around the globe

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  • Thomas Dimpfl
  • Robert Jung

    ()
    (University of Erfurt, Staatswissenschaftliche Fakultät)

Abstract

Financial market spillovers around the globeThis paper investigates the transmission of return and volatility spillovers around the globe. It draws on index futures of three representative indices, namely the Dow Jones Euro Stoxx 50, the S&P 500 and the Nikkei 225. Devolatised returns and realised volatilities are modeled separately using a structural vector autoregressive model, thereby accounting for the particular sequential time structure of the trading venues. Within this framework, we test hypotheses in the spirit of Granger causality tests, investigate the short-run dynamics in the three markets using impulse response functions, and identify leadership effects through variance decomposition. Our key results are as follows. We find weak and shortlived return spillovers, in particular from the USA to Japan. Volatility spillovers are more pronounced and persistent. The information from the home market is most important for both returns and volatilities; the contribution from foreign markets is less pronounced in the case of returns than in the case of volatility. Possible gains in terms of forecasting precision when applying our modelling strategy are illustrated by a forecast evaluation.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena in its series Global Financial Markets Working Paper Series with number 20-2011.

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Date of creation: 22 Aug 2011
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Handle: RePEc:hlj:hljwrp:20-2011

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Web page: http://www.gfinm.de

Related research

Keywords: pillovers; Index Futures; Realized Volatility; Structural VAR model;

This paper has been announced in the following NEP Reports:

References

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  1. Diebold, Francis X. & Yilmaz, Kamil, 2008. "Measuring financial asset return and volatilty spillovers, with application to global equity markets," CFS Working Paper Series, Center for Financial Studies (CFS) 2008/26, Center for Financial Studies (CFS).
  2. Christos Savva & Denise Osborn & Len Gill, 2009. "Spillovers and correlations between US and major European stock markets: the role of the euro," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 19(19), pages 1595-1604.
  3. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  4. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Michael Melvin & Bettina Peiers Melvin, 2003. "The Global Transmission of Volatility in the Foreign Exchange Market," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 670-679, August.
  6. Bollen, Bernard & Inder, Brett, 2002. "Estimating daily volatility in financial markets utilizing intraday data," Journal of Empirical Finance, Elsevier, Elsevier, vol. 9(5), pages 551-562, December.
  7. Pesaran, Bahram & Pesaran, M. Hashem, 2010. "Conditional volatility and correlations of weekly returns and the VaR analysis of 2008 stock market crash," Economic Modelling, Elsevier, Elsevier, vol. 27(6), pages 1398-1416, November.
  8. Giampiero Gallo & Edoardo Otranto, 2007. "Volatility Spillovers, Interdependence and Comovements: A Markov Switching Approach," Econometrics Working Papers Archive, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" wp2007_11, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  9. Susmel, Raul & Engle, Robert F., 1994. "Hourly volatility spillovers between international equity markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 13(1), pages 3-25, February.
  10. Gebka, Bartosz & Serwa, Dobromil, 2007. "Intra- and inter-regional spillovers between emerging capital markets around the world," Research in International Business and Finance, Elsevier, Elsevier, vol. 21(2), pages 203-221, June.
  11. Menkveld, Albert J. & Koopman, Siem Jan & Lucas, Andre, 2007. "Modeling Around-the-Clock Price Discovery for Cross-Listed Stocks Using State Space Methods," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 213-225, April.
  12. Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 174-196, Spring.
  13. Pesaran, M.H., 2010. "Conditional Volatility and Correlations of Weekly Returns and the VaR Analysis of 2008 Stock Market," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1025, Faculty of Economics, University of Cambridge.
  14. Hyun-Jung Ryoo & Graham Smith, 2004. "The impact of stock index futures on the Korean stock market," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(4), pages 243-251.
  15. Baur, Dirk & Jung, Robert C., 2006. "Return and volatility linkages between the US and the German stock market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(4), pages 598-613, June.
  16. Barry Harrison & Winston Moore, 2009. "Spillover effects from London and Frankfurt to Central and Eastern European stock markets," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 19(18), pages 1509-1521.
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