Volatility Transmission and Changes in Stock Market Interdependence in the European Community
European Review of Economics and Finance, Vol.3, No. 3, pp. 203-231, 2004
25 Pages Posted: 14 Sep 2010
Date Written: October 11, 2004
A multivariate BEKK GARCH representation is employed to model stock market interdependence in groups of EC stock markets between 1987 and 2003. Using daily data, we estimate the effect that news or information spillovers from one market has on the next day returns in other markets. We quantify the sources of volatility transmission as price changes and noise. Our models allow interdependencies to vary over time allowing us to investigate whether interdependence changes following the introduction of the single currency. Generally, stock market integration increases after 1999 although there are differences in the levels of interdependence between (and within) northern and southern European markets. Information spillovers are tend to be transmitted more through noise than price changes though volatility transmission between Germany, Europe’s leading economic power, and the UK, Europe’s leading financial power, is through price changes after 1999. The results support the view that financial deregulation leads to financial market integration implying that further deregulatory acts can be expected to realise positive outcomes. The major European markets are increasingly integrated with the international (US) market. We observe the main transmission mechanism between Germany and the US is noise whereas it is price changes between the UK and US. Whereas US information influences UK returns more than UK information affects US returns, innovations in Germany are at least as important as US news is on next day German returns. Our conjecture is that the information content of European markets is not homogeneous to international markets.
Keywords: stock markets, integration, interdependence, volatility transmission, spillover, GARCH, BEKK representation, EC
JEL Classification: C32, G15, F36
Suggested Citation: Suggested Citation