"To what extent stock returns are driven by mean and volatility spillovers effect (EU, US&OIL)"?

The purpose of this paper is to examine the mean and volatility spillovers effects from a global factor US (GF US) stock market, regional factor Europe (RF EU) stock market and as the world factor oil price (WF Oil) changes on the eight European emerging and developing countries from September 2000 until March 2012. The countries examined are: Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Turkey, and the Ukraine. The mean and volatility spillover effects across financial markets are explored by applying the GJR-GARCH model introduced by Glosten, Jagannathan and Runkle in 1993. Eventually, the calculated variance ratios will allow us to quantitatively analyze the proportion of volatility spillovers from various sources. Additionally, by excluding the oil spillover effects, the paper also examines the size and effect of spillover effects from two markets only: Europe and the US. The generalized autoregressive conditional heteroskedasticity (GARCH) process is recognized model for analysis of volatility and return spillovers amongst international financial markets. The main econometric specification, namely AR(1)-GJR-GARCH allows to test spillover effects and investigate how much conditional variance individual country j has been explained respectively by Global Factor US (GF US), Regional Factor EU (RF EU), local factor (own market of country j) as well as the World Factor Oil Price (WF Oil). The study finds strong indication of volatility spillover effects from the US-global, EU-regional, and the world factor oil towards individual stock markets. While both mean and volatility spillover transmissions from the US are found to be significant, EU mean spillover effects are negligible. To evaluate the magnitude of volatility spillovers, the variance ratios are also computed and the results draw to attention that the individual emerging countries’ stock returns are mostly influenced by the U.S volatility spillovers rather than EU or oil markets. Additionally, examination of only global and regional stock markets spillover transmissions into European stock markets also confirms the dominating presence of the U.S spillover transmissions. Furthermore, I also implement asymmetric tests on stock returns of eight markets. The stock market returns of Hungary, Poland, Russia and the Ukraine are found to respond asymmetrically to negative and positive shocks in the US stock returns. The weak evidence of asymmetric effects with respect to oil market shocks is found only in the case of Russia and the quantified variance ratios indicate that presence of oil market shocks are relatively higher for Russia. Moreover, a model with dummy variable confirms the effect of European Union enlargement on stock returns only for Romania. Finally, a conditional model suggests that the spillover effects are partially explained by instrumental macroeconomic variables, out of which exchange rate fluctuations play the key role in explaining the spillover parameters rather than total trade to GDP ratios in most investigated countries.