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Empirical research confirms the existence of volatility spillovers across national stock markets. However, the models in use are mostly statistical ones. Much less is known about the actual transmission mechanisms; theoretical literature is scarce, and so is empirical work trying to estimate specific theoretical models. Some economic theory founded tests for such spillovers have been developed for non-overlapping markets; this institutional set up provides a way around the problems of estimating a system of simultaneous equations. However, volatility spillovers across overlapping markets might be as important a phenomenon as across non-overlapping markets. Building on recent advances in econometrics of identifying structural vector autoregressive models, this paper proposes a way to estimate an existing signal-extraction model that explains volatility spillovers across simultaneously open stock markets. Furthermore, a new empirical test for detection of such spillovers is derived. As an empirical application, the theoretical model is fitted to daily data of eurozone stock markets in years 2010-2011. Evidence of volatility spillovers across the countries is found.

Item Type: MPRA Paper -

Original Title: On detection of volatility spillovers in simultaneously open stock markets-

Language: English-

Keywords: Volatility transmission; financial contagion; SVAR identification; hypothesis testing; stock markets; euro debt crisis-

Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider TradingC - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: GeneralG - Financial Economics > G1 - General Financial Markets > G15 - International Financial MarketsC - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C30 - GeneralD - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design-

Author: Kohonen, Anssi

Source: https://mpra.ub.uni-muenchen.de/37504/

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