A Regional Analysis of Markets Uncertainty Spillover

This study aims to describe the transmission of uncertainty between the stock markets of four aggregate regions: North America, Europe non Euro-zone, Asia and the euro area. We use a non-linear VAR model with innovations following a Multivariate GARCH with variance regime change. The interest of the model with regime change is to correct the estimation bias caused by the overestimation of the shocks persistence. We apply the non-linear VAR model with regime change in daily MSCI data aggregated from four regions over the period from June 2005 to October 2013. This period included the crisis episodes in 2007 and 2011. Our results indicate the importance of taking into account changes in variance in measuring the persistence of volatility shocks. They also show the high exposure of European and Asian markets to the uncertainties of North American markets. The transmission in time of crisis is higher compared to the quiet period. This result confirms the contagious nature of the crises of 2007 and 2011 and supports the thesis of the contingency theory to crisis.