Transmission of Stock Return and Volatility Across G-7 Countries

Abstract

This paper investigates transmission of shocks in return and volatility across the G-7 countries using daily closing stock returns from 19th July 1994 to 30th January 2004. To capture observed asymmetry in volatility generated by the innovations within and across markets, a Vector Autoregressive-Exponential Generalized Autoregressive Conditional Heteroscedasticity (VAR-EGARCH) model has been used. Significant spillover in return and volatility are observed from US markets to other developed markets. There are evidences of strong regional dependency in volatility but not in return across the major European markets. Returns in Japanese market are significantly influenced by the US, UK and French markets, while all other markets (except Canada) exhibit significant return spillovers from Japanese market. Unlike returns, Japanese volatility is not at all influenced by any other G-7 markets. Volatilities in the European markets also contribute to the volatility in US and Canadian market. Own-volatility spillovers are generally higher than cross-volatility spillovers for all markets.

Keywords: Stock return, Volatility, Spillover, VAR, EGARCH, Innovations