Time Varying Volatility Indexes and Their Determinants: Evidence from Developed and Emerging Stock Markets

43 Pages Posted: 16 Sep 2014 Last revised: 26 Sep 2014

See all articles by Nalin Prasad

Nalin Prasad

University of Sydney Business School

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business; Financial Research Network (FIRN)

Suk-Joong Kim

The University of Sydney Business School

Date Written: September 15, 2014

Abstract

This paper investigates volatility spillovers across 16 stock markets of both advanced and emerging economies using the spillover index methodology put forward by Diebold and Yilmaz (2012). Realised volatility as defined by Andersen et al (2003) calculated from high frequency data form the basis on which these spillovers are calculated. They are compared with spillovers based on the volatility estimators put forward by Garman and Klass (1980), Parkinson (1980) and the univariate GARCH methodology (Bollerslev, 1986) used in many previous studies. We find that the time series of total spillovers is similar regardless of the volatility proxy used and spillovers increased dramatically during the global financial crisis of 2008 and the European sovereign debt crisis that followed. More differences arise when comparing directional spillovers to and from individual stock markets, particularly when using GARCH based estimations. We find that the larger stock markets from the advanced western economies, particularly the US, dominate volatility transmission to other markets. Emerging markets such as China, India and Brazil are still relatively isolated and contribute less to global volatility spillovers, though their contribution has increased considerably after 2006. We investigate potential determinants of net spillovers between markets and find that the level of volatility in one market relative to that in other markets is the most important factor in increasing spillovers transmitted.

Keywords: Stock market spillovers, Realized Volatility, Spillover index, VAR, Volatility transmission

JEL Classification: G15, F30

Suggested Citation

Prasad, Nalin and Grant, Andrew R. and Kim, Suk-Joong, Time Varying Volatility Indexes and Their Determinants: Evidence from Developed and Emerging Stock Markets (September 15, 2014). Available at SSRN: https://ssrn.com/abstract=2496751 or http://dx.doi.org/10.2139/ssrn.2496751

Nalin Prasad

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
61-2-9036-7991 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Suk-Joong Kim (Contact Author)

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9114 0940 (Phone)
+61 2 9351 6461 (Fax)

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