Integration at a Cost: Evidence from Volatility Impulse Response Functions

NUIM Working Paper No. N1540305

31 Pages Posted: 7 Apr 2005

Date Written: February 25, 2005

Abstract

We investigate the international information transmission between the U.S. and the rest of the G-7 countries using daily stock market return data covering the last 20 years. A pre-1995 and post-1995 analysis reveals that the linkages between the markets have changed substantially in the more recent era, suggesting that national markets have become more interdependent. In the majority of the countries under scrutiny, we provide evidence of direct volatility spillovers, running mainly from the US and pointing to more rapid information transmission during the recent years. We further uncover the dynamics of the volatility spillovers between the international stock markets by means of a Volatility Impulse Response Analysis. Our findings, based on three historical shocks that have caused turbulence in the stock markets, suggest that the persistence of volatility shocks has increased substantially during the post-1995 period mainly due to increased persistence and interdependence in the volatility of all markets. As a result, volatility shocks in the international stock markets nowadays perpetuate for a significant longer period compared to the pre-1995 era.

Keywords: Volatility spillovers, volatility impulse response functions, stock market, ARCH-BEKK

JEL Classification: G15, C32

Suggested Citation

Panopoulou, Ekaterini and Pantelidis, Theologos, Integration at a Cost: Evidence from Volatility Impulse Response Functions (February 25, 2005). NUIM Working Paper No. N1540305, Available at SSRN: https://ssrn.com/abstract=696603 or http://dx.doi.org/10.2139/ssrn.696603

Ekaterini Panopoulou (Contact Author)

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Theologos Pantelidis

University of Kent ( email )

Canterbury, Kent CT2 7PE
United Kingdom

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