Volatility co-movements and spillover effects within the Eurozone economies: A multivariate GARCH approach using the financial stress index

MacDonald, R., Sogiakas, V. and Tsopanakis, A. (2018) Volatility co-movements and spillover effects within the Eurozone economies: A multivariate GARCH approach using the financial stress index. Journal of International Financial Markets, Institutions and Money, 52, pp. 17-36. (doi:10.1016/j.intfin.2017.09.003)

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Abstract

The Eurozone crisis is one the most important economic event in recent years. At its peak, the effects of the crisis have put at serious risk the outcome of the euro project, exposing the inherent weaknesses and vulnerabilities of the monetary union. As the degree of economic and financial integration of these countries is significant, we aim to investigate in details the potential cross-covariance and spillover effects between the Eurozone economies and financial markets. In order to do this, we employ financial stress indexes, as systemic risk metrics in a multivariate GARCH model. This method is able to capture markets’ dependencies and volatility spillovers and is employed on a single market level as well as on the full spectrum of Eurozone markets. The empirical results have shown the important and intensive stress transmission on banking and money markets. Moreover, the role of peripheral countries as stress transmitter is verified, but only for particular periods. The significant spillover effects from core countries are also evident, indicating their important role in the Euro Area and its overall financial stability. The “decoupling” hypothesis is empirically verified, underling the gradually decreasing intensity of spillovers between Euro Area countries. Overall, this paper exhibits the complex structure of spillover effects for Eurozone, along with a clustering effect in the most recent times.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald and Tsopanakis, Mr Andreas and Sogiakas, Dr Vasilios
Authors: MacDonald, R., Sogiakas, V., and Tsopanakis, A.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of International Financial Markets, Institutions and Money
Publisher:Elsevier
ISSN:1042-4431
ISSN (Online):1873-0612
Published Online:28 October 2017
Copyright Holders:Copyright © 2017 Elsevier B.V.
First Published:First published in Journal of International Financial Markets, Institutions and Money 52:17-36
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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