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Cross‐market spillovers with ‘volatility surprise’
Author(s) -
Aboura Sofiane,
Chevallier Julien
Publication year - 2014
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2014.08.002
Subject(s) - surprise , volatility (finance) , economics , econometrics , spillover effect , financial economics , volatility swap , financial crisis , interdependence , financial market , monetary economics , implied volatility , finance , macroeconomics , political science , law , psychology , social psychology
This article adopts the asymmetric DCC with one exogenous variable (ADCCX) model developed by Vargas (2008), by updating the concept of ‘volatility surprise’ to capture cross‐market relationships. Current methods for measuring spillovers do not focus on volatility interactions, and neglect cross‐effects between the conditional variances. This paper aims to fill this gap. The dataset includes four aggregate indices representing equities, bonds, foreign exchange rates and commodities from 1983 to 2013. The results provide strong evidence of spillover effects coming from the ‘volatility surprise’ component across markets. Against the background of the recent financial crisis, the aim is to contribute to the literature on the interdependencies of financial markets, both in conditional means and (co)variances. In addition, asset management implications are derived.