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Risk contagion among international stock markets

  • Asgharian, Hossein
  • Nossman, Marcus

We develop a stochastic volatility model with jumps in returns and volatility to analyze the risk spillover from the U.S. market and the regional market to a number of European countries' equity markets. The key advantage of this approach compared to the earlier approaches is that it enables us to identify jumps and investigate spillover of extreme events across borders. We find that a large part of the jumps in the local markets are due to the U.S. market and the regional market. The U.S. contribution to the variances is in general below the contribution from the regional market. In general, we observe an increasing integration during the last two decades, which, to some extent, can be related to the advancement of the European Union. Furthermore, we show that the identification of the jumps can be used as a useful signal for portfolio reallocation.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 1 (February)
Pages: 22-38

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:1:p:22-38
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Baele, L., 2003. "Volatility Spillover Effects in European Equity Markets," Discussion Paper 2003-114, Tilburg University, Center for Economic Research.
  2. Ng, Angela, 2000. "Volatility spillover effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 207-233, April.
  3. Charlotte Christiansen, 2007. "Decomposing European Bond and Equity Volatility," CREATES Research Papers 2007-06, School of Economics and Management, University of Aarhus.
  4. Hossein Asgharian & Christoffer Bengtsson, 2006. "Jump Spillover in International Equity Markets," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(2), pages 167-203.
  5. Neil Shephard & Ole Barndorff-Nielsen, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Series Working Papers 2004-FE-01, University of Oxford, Department of Economics.
  6. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 1-37.
  7. Geert Bekaert & Campbell R. Harvey, 1995. "Emerging Equity Market Volatility," NBER Working Papers 5307, National Bureau of Economic Research, Inc.
  8. Neil Shephard & Ole E. Barndorff-Nielsen, 2003. "Power and bipower variation with stochastic volatility and jumps," Economics Series Working Papers 2003-W18, University of Oxford, Department of Economics.
  9. Jun Liu & Francis A. Longstaff & Jun Pan, 2002. "Dynamic Asset Allocation With Event Risk," NBER Working Papers 9103, National Bureau of Economic Research, Inc.
  10. Das, Sanjiv Ranjan & Uppal, Raman, 2002. "Systemic Risk and International Portfolio Choice," CEPR Discussion Papers 3305, C.E.P.R. Discussion Papers.
  11. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
  12. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  13. Wu, Liuren, 2003. " Jumps and Dynamic Asset Allocation," Review of Quantitative Finance and Accounting, Springer, vol. 20(3), pages 207-43, May.
  14. Kim, Suk Joong & Moshirian, Fariborz & Wu, Eliza, 2005. "Dynamic stock market integration driven by the European Monetary Union: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2475-2502, October.
  15. Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, 06.
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