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Spillover Effects in the Volatility of Financial Markets

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  • E. Otranto

Abstract

Recent econometric and statistical models for the analysis of volatility in financial markets serve the purpose of incorporating the effect of other markets in their structure, in order to study the spillover or the contagion phenomena. Extending the Multiplicative Error Model we are able to capture these characteristics, under the assumption that the conditional mean of the volatility can be decomposed into the sum of one component representing the proper volatility of the time series analyzed, and other components, each representing the volatility transmitted from one other market. Each component follows a proper dynamics with elements that can be usefully interpreted. This particular decomposition allows to establish, each time, the contribution brought by each individual market to the global volatility of the market object of the analysis. We experiment this model with four stock indices.

Suggested Citation

  • E. Otranto, 2012. "Spillover Effects in the Volatility of Financial Markets," Working Paper CRENoS 201217, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201217
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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