Spillover Effects between Financial Markets

<p>The aim of this work is to define and estimate links among international equity markets and local regions (Europe, Asia, America). In this work bivariate DCC-GARCH model (Dynamic Conditional Correlation -Generalized Autoregressive Conditional Heteroskedasticity) is used to estimate volatility spillover effects, cross volatility shocks and dynamic conditional correlation. Volatility interrelationships among the the USA, European markets (the UK, Germany, Russia) and Asian markets (Japan, Hong-Kong) are tested by analyzing closing prices of representative market indices during the period from 2000 to 2014.</p><p>The interaction between financial markets has increased with the integration of national economies via international trade and finance. The process of integration has involved both emerging and developed capital markets, which has formed strong connections in global economy. The Financial Crisis of 2007 - 2008 proved the existence of markets interrelationships, which makes the researchers in this field draw meticulous attention to this problem. The object of study is markets interdependencies. An understanding of the origins and drivers of markets interaction help investors, consumers and regulators, it contributes to securities pricing, portfolio optimization, developing hedging and regulatory strategies, etc. In many studies the degree of market integration plays a crucial role.</p><p>The data include daily closing prices of market indices of the USA (S&amp;P500), Russia (RTS), the UK (FTSE100), Japan (Nikkei225), Germany (DAX), Hong-Kong (Hang Seng). The time period is from January 2000 to April 2014.</p><p>As a conclusion - the US stock market is a source of volatility for international and local capital markets, only developed markets demonstrate an impact on the American market, developed capital markets are less susceptible to the volatility of the US economy, rather than emerging, European markets are exposed to the German DAX volatility. But still there are statistically significant volatility spillovers from Russian to other equity markets.</p>