What Explains Volatility Spillovers in the Financial Systems of Emerging Market Countries: Co-Movement, Transmission, or Contagion?
55 Pages Posted: 21 Aug 2016
Date Written: September 15, 2015
This paper investigates the occurrence of dependency between foreign exchange markets and stock markets in emerging market (EM) countries by testing volatility spillovers of asset returns using a BEKK GARCH (1,1) model. The author modifies the classical BEKK GARCH model in order to study the dynamics and origins of volatility spillovers. The study’s empirical results are threefold. First, volatility spillovers between the foreign exchange and stock markets are significant in most EM countries. Second, such spillovers are found to be contingent on the sample period and market conditions, a result that is generally consistent with findings in the literature on time-varying, asymmetric, and contagion-shift spillovers. The paper also examines the sources of volatility spillovers, namely, co-movement through common information, sequential information transmission, and contagion, by specifying alternative models that restrict the mean equation of the GARCH model. The results suggest that, under normal conditions, the relevant spillovers are explained mostly by comovement from common information about fundamentals; during crises, however, while common information plays a role, market contagion also becomes an important source of spillovers.
Keywords: Cross-asset volatility spillovers, financial market Integration, bi-variate BEKK GARCH model, source of volatility spillovers, emerging market countries
JEL Classification: G14, G15
Suggested Citation: Suggested Citation