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Market Volatility Transmission and Central Banking: What Happened during the Subprime Crisis?

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  • Kamel Malik Bensafta
  • Gervasio Semedo

Abstract

We examine market volatility spillover during calm and crisis periods. First, we define endogenous and exogenous market volatility: endogenous volatility refers to the early part of uncertainty in the market, while, exogenous volatility is not fully anticipated and occurs as a result of decisions taken by actors and institutions. Endogenous volatility is captured by the mean of the GARCH-type process. We compare market reaction to central banking for two states: outside the subprime crisis and during the subprime crisis. We evaluate the effectiveness of central banking during the crisis. We used a Multivariate GARCH model with structural breaks in variance. Our main findings confirm the American market's impact on European markets, and changes in cross-market spillover during the crisis. The results show the effect of communications, meeting days and policy decisions of the Fed on world markets.

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  • Kamel Malik Bensafta & Gervasio Semedo, 2014. "Market Volatility Transmission and Central Banking: What Happened during the Subprime Crisis?," International Economic Journal, Taylor & Francis Journals, vol. 28(4), pages 559-588, December.
    • Handle: RePEc:taf:intecj:v:28:y:2014:i:4:p:559-588
    DOI: 10.1080/10168737.2014.907580
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    Cited by:

    1. Mobeen Ur Rehman, 2016. "Financial Contagion in EFA Markets in Crisis Periods: A Multivariate GARCH Dynamic Conditional Correlation Framework," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 21(2), pages 121-151, July-Dec.

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