Abstract
Abstract In this paper we examine the issue of asymmetry in the return and volatility spillover effects from the US equity market into the Canadian and Mexican equity markets. We model the conditional volatility of the returns in each of the three markets using the asymmetric power model of Ding, Granger and Engle (1993). The empirical findings indicate that the US market has a significant impact on the returns in the Canadian and Mexican markets. However, the findings for Canada vary considerably from those for Mexico. In particular, the empirical results indicate that volatility spillover effects, but not return spillover effects, exhibit an asymmetric behavior, with negative shocks from the US equity market impacting on the conditional volatility of the Canadian and Mexican equity markets more deeply than positive shocks. Moreover, while the impact of positive shocks from the US equity market is not much different between the two markets, this is not the case with negative shocks, which affect the volatility of the Mexican market more intensely than the volatility of the Canadian market.
Highlights
We find strong statistical evidence that indicate that volatility spillover effects, but not in return spillover effects, exhibit an asymmetric behavior, with negative shocks from the US equity market impacting on the conditional volatility of the Canadian and Mexican equity markets more deeply than positive shocks
The model is estimated by numerical maximum likelihood procedures, using the algorithm developed by Berndt, Hall, Hall and Hausman (1974), but all test statistics and t-values are computed using the quasi-maximum likelihood methods (QML) described by Bollerslev and Wooldridge (1992), which are robust to distributional non-normalities
We find strong evidence that returns from the US stock market are significant carriers of information for Canada, whereas they have an insignificant influence on the Mexican stock market
Summary
There is ample evidence that national equity markets have become more interdependent in recent years. 1 The developments in the liberalization of capital movements and financial reforms, coupled with advances in computer technology and information processing, have reduced the isolation of national equity markets and increased their ability to react promptly to news and shocks originating from the rest of the world. Evidence of increased linkages between national equity markets has been found following the October 1987 market crash, and the Asian and Russian financial crises. In general, most of the research has documented four stylized facts: 1) correlations across stock markets are time-varying; 2) returns in major markets tend to be more correlated when volatility is high; 3) all major episodes of high volatility are associated with market drops; and, 4) correlations in volatility and returns appear to be causal from the US market while none of the other markets explains US stock market movements.There exists widespread evidence that national equity markets returns show strong asymmetries in conditional volatilities. Yet, there is no evidence in the literature documenting that the international transmission of stock returns and volatility exhibits asymmetric behaviors. There is ample evidence that national equity markets have become more interdependent in recent years. 1 The developments in the liberalization of capital movements and financial reforms, coupled with advances in computer technology and information processing, have reduced the isolation of national equity markets and increased their ability to react promptly to news and shocks originating from the rest of the world.. Evidence of increased linkages between national equity markets has been found following the October 1987 market crash, and the Asian and Russian financial crises.. There exists widespread evidence that national equity markets returns show strong asymmetries in conditional volatilities.. There is no evidence in the literature documenting that the international transmission of stock returns and volatility exhibits asymmetric behaviors. While international transmission of stock returns and volatility has been widely detected in European and Asian countries, sparse attention has been devoted to transmission of stock return and volatility in North America markets.
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