Risk Contagion among International Stock Markets

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Abstract

Abstract in Undetermined
We develop a stochastic volatility model with jumps in returns and volatility to analyze the risk spillover from the U.S. market and the regional market to a number of European countries' equity markets. The key advantage of this approach compared to the earlier approaches is that it enables us to identify jumps and investigate spillover of extreme events across borders. We find that a large part of the jumps in the local markets are due to the U.S. market and the regional market. The U.S. contribution to the variances is in general below the contribution from the regional market. In general, we observe an increasing integration during the last two decades, which, to some extent, can be related to the advancement of the European Union. Furthermore, we show that the identification of the jumps can be used as a useful signal for portfolio reallocation.

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Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • Spillover, Jump, Stochastic volatility, Wavelet, Markov Chain Monte Carlo, Integration
Original languageEnglish
Pages (from-to)22-38
JournalJournal of International Money and Finance
Volume30
Issue number1
Publication statusPublished - 2011
Publication categoryResearch
Peer-reviewedYes