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Dynamic Interdependence and Volatility Transmission in Turkish and European Equity Markets

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  • Huseyin Tastan

    (Yildiz Technical University)

Abstract

This paper investigates dynamic interdependence, price and volatility transmissions and financial integration between Turkey and major equity markets in EU and USA. We attempt to quantify the dynamic relationship among developed stock exchanges of Germany, France, Britain, US and Turkey, an important emerging market. Using daily data on stock prices we analyze price and volatility spillovers in a vector autoregression-dynamic conditional correlations-multivariate generalized autoregressive conditional heteroskedacticity (VAR-DCC-MVGARCH) framework. This approach enables us to measure the extent to which these equity markets are interrelated by taking into account the time-varying variance-covariance structure. Since the major trade partners of Turkey are EU countries it is of interest to examine any changes in the structure of volatility spillovers. To this end, we analyze the effects of customs union agreement between Turkey and EU on the dynamic interdependence of stock markets by dividing the sample into two periods. The analysis reveals that, although they are small in magnitude as compared to their counterparts in developed markets, the conditional correlations can be assumed to be constant in the pre-customs union agreement while it fluctuates significantly in the post-customs union agreement.

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Bibliographic Info

Paper provided by Turkish Economic Association in its series Working Papers with number 2005/10.

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Length: 32 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:tek:wpaper:2005/10

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  1. In, Francis & Kim, Sangbae & Yoon, Jai Hyung & Viney, Christopher, 2001. "Dynamic interdependence and volatility transmission of Asian stock markets: Evidence from the Asian crisis," International Review of Financial Analysis, Elsevier, vol. 10(1), pages 87-96.
  2. Utku Utkulu & Dilek Seymen, 2004. "Trade and Competitiveness Between Turkey and the EU: Time Series Evidence," Working Papers 2004/8, Turkish Economic Association, revised Mar 2004.
  3. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  4. Angelos Kanas, 1998. "Volatility spillovers across equity markets: European evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 245-256.
  5. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
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  7. Booth, G. Geoffrey & Martikainen, Teppo & Tse, Yiuman, 1997. "Price and volatility spillovers in Scandinavian stock markets," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 811-823, June.
  8. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
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  12. Koutmos, Gregory & Booth, G Geoffrey, 1995. "Asymmetric volatility transmission in international stock markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 747-762, December.
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  14. McNew, Kevin & Fackler, Paul L., 1997. "Testing Market Equilibrium: Is Cointegration Informative?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 22(02), December.
  15. Assaf Ata, 2003. "Transmission of Stock Price Movements: The Case of GCC Stock Markets," Review of Middle East Economics and Finance, De Gruyter, vol. 1(2), pages 73-92, August.
  16. Shamsuddin, Abul F. M. & Kim, Jae H., 2003. "Integration and interdependence of stock and foreign exchange markets: an Australian perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(3), pages 237-254, July.
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