Asymmetric variance and spillover effects: Regime shifts in the Spanish stock market

Abstract

Our objective is to analyze the effects of sudden shifts in variance on large and small capitalization portfolios in the Spanish stock market. We improve the previous literature by using a procedure based on the iterated cumulative sums of squares (ICSS) algorithm to detect sudden changes in variance incorporating them in a Bivariate GARCH framework. We find asymmetric effects, which disappear when sudden shifts are taken into account, but only after the European Monetary Union (EMU). Our findings also indicate that volatility and shock transmissions between large and small cap portfolios are reduced to their own past volatility and news after the EMU.