VOLATILITY SPILLOVER AND CHANNELS TRANSMISSION DURING SUBPRIME CRISIS: EMPIRICAL STUDY OF USA STOCK MARKET AND OTHER DEVELOPED STOCK MARKETS
VOLATILITY SPILLOVER AND CHANNELS TRANSMISSION DURING SUBPRIME CRISIS: EMPIRICAL STUDY OF USA STOCK MARKET AND OTHER DEVELOPED STOCK MARKETS

Summary/Abstract: This paper proposes a framework to gauge the degree of volatility transmission during the subprime crisis of 2008 between U.S stock market and developed stock markets (France, Germany, United Kingdom, Japan) by deriving tests for conditional independence among daily volatility measures and identifies the important transmission channels on these macroeconomic variables (Real interest rate, Productivity index, Ratio of M2 to FER, Exchange rate, Terms of trade, account transaction). We use univariate and multivariate GARCH models to investigate the proprieties of conditional volatility and to estimate the volatility spillover effect by using specifically the Baba-Engle-Kraft-kroner BEKK-GARCH model and time varying correlation (DVEC). The GARH model shows the volatility persistence of U.S and developed stock markets. Based on the BEKK-GARCH model, the estimation parameters result are statistically significant identifying the volatility spillover between U.S stock market and developed stock markets. The results of the time varying correlation show that correlation increased between U.S and developed markets during the subprime crisis period. These finding results prove the contagion effect of U.S financial crisis of 2008. The estimation results of time varying correlation and BEKK-GARCH between the macroeconomic variables of U.S and developed countries prove that the trade link as a pertinent channel transmission of Subprime crisis.

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