Volatility Co-Movements and Spillover Effects within the Eurozone Economies: A Multivariate GARCH Approach Using the Financial Stress Index

47 Pages Posted: 18 Jan 2015 Last revised: 24 Oct 2017

See all articles by Ronald MacDonald

Ronald MacDonald

University of Glasgow - Adam Smith Business School

Vasilios I. Sogiakas

University of Glasgow

Andreas Tsopanakis

Cardiff University - Cardiff Business School

Date Written: October 24, 2017

Abstract

The Eurozone crisis is one the most important economic event in recent years. At its peak, the effects of the crisis have put at serious risk the outcome of the euro project, exposing the inherent weaknesses and vulnerabilities of the monetary union. As the degree of economic and financial integration of these countries is significant, we aim to investigate in details the potential crosscovariance and spillover effects between the Eurozone economies and financial markets. In order to do this, we employ financial stress indexes, as systemic risk metrics in a multivariate GARCH model. This method is able to capture markets’ dependencies and volatility spillovers and is employed on a single market level as well as on the full spectrum of Eurozone markets. The empirical results have shown the important and intensive stress transmission on banking and money markets. Moreover, the role of peripheral countries as stress transmitter is verified, but only for particular periods. The significant spillover effects from core countries are also evident, indicating their important role in the Euro Area and its overall financial stability. The “decoupling” hypothesis is empirically verified, underling the gradually decreasing intensity of spillovers between Euro Area countries. Overall, this paper exhibits the complex structure of spillover effects for Eurozone, along with a clustering effect in the most recent times.

Keywords: Financial Stress Index, Financial Crisis, Spillover Effects, Systemic Risk, GARGH-BEKK model

JEL Classification: C43, C58, G01, G15

Suggested Citation

MacDonald, Ronald and Sogiakas, Vasilios I. and Tsopanakis, Andreas, Volatility Co-Movements and Spillover Effects within the Eurozone Economies: A Multivariate GARCH Approach Using the Financial Stress Index (October 24, 2017). Journal of International Financial Markets, Institutions and Money, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2551306

Ronald MacDonald

University of Glasgow - Adam Smith Business School ( email )

Andreas Tsopanakis (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

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