Measuring Volatility Co-Movement: An Empirical Investigation in North America, Europe and Asia Capital Markets

Abstract

The interdependence of global economy now extends across a far broader range of countries than ever before. An understanding of global volatility co-movement in between stock exchanges is important hence substantial changes in volatility of financial markets are capable of having significant negative effects on risk-averse investors. Thus, this study attempts to identify the co-movement of stock market volatility among the regions North America, Europe and Asia. The econometric models of Autoregressive Conditional Heteroskedasticity (ARCH), Generalized ARCH (GARCH), Johansen Cointegration Test, Vector Autoregression and VAR Variance Decompositions are employed. Daily returns of the market portfolio of these countries are used for the investigation. The period of study is 2000 to 2010 which represents current crisis movements of these markets. The empirical results indicate that the volatility co-movement is not that momentous since in all the markets more than 97% of the forecast error variance is explained by the market itself. However, the volatility co-movement between Sri Lanka stock market with that of India, Japan, Hong Kong, Singapore, UK and US stood in declining order of volatility co-movement respectively. Singapore and India are found to be the most endogenous markets with almost 03% of their forecast error variance is explained by the other markets under study.