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This paper examines quantile dependence between international stock marketsand evaluates its use for improving volatility forecasting. First, we analyzequantile dependence and directional predictability between the US stock marketand stock markets in the UK, Germany, France and Japan. We use thecross-quantilogram, which is a correlation statistic of quantile hit processes.The detailed dependence between stock markets depends on specific quantileranges and this dependence is generally asymmetric; the negative spillovereffect is stronger than the positive spillover effect and there exists strongdirectional predictability from the US market to the UK, Germany, France andJapan markets. Second, we consider a simple quantile-augmented volatility modelthat accommodates the quantile dependence and directional predictabilitybetween the US market and these other markets. The quantile-augmentedvolatility model provides superior in-sample and out-of-sample volatilityforecasts.

Quantile Dependence between Stock Markets and its Application in Volatility Forecasting