Equity Market Contagion in Return Volatility during Euro Zone and Global Financial Crises: Evidence from FIMACH Model

A M M Shahiduzzaman Quoreshi,Reaz Uddin,Viroj Jienwatcharamongkhol

doi:10.3390/jrfm12020094

A M M Shahiduzzaman Quoreshi, Reaz Uddin + Show 1 more

Open Access

https://doi.org/10.3390/jrfm12020094

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Abstract

The current paper studies equity markets for the contagion of squared index returns as a proxy for stock market volatility, which has not been studied earlier. The study examines squared stock index returns of equity in 35 markets, including the US, UK, Euro Zone and BRICS (Brazil, Russia, India, China and South Africa) countries, as a proxy for the measurement of volatility. Results from the conditional heteroskedasticity long memory model show the evidence of long memory in the squared stock returns of all 35 stock indices studied. Empirical findings show the evidence of contagion during the global financial crisis (GFC) and Euro Zone crisis (EZC). The intensity of contagion varies depending on its sources. This implies that the effects of shocks are not symmetric and may have led to some structural changes. The effect of contagion is also studied by decomposing the level series into explained and unexplained behaviors.

Highlights

The US subprime crisis, referred to as the global financial crisis (GFC), in 2008 and the eventual Euro Zone crisis (EZC) beginning in 2009 are the most devastating financial crises in recent history
Since the absolute values of dj are less than 0.5, we find the evidence of long memory in squared stock returns of all the 35 stock indices that are in line with previous studies (e.g., Granger and Hyung 1999; Bhardwaj and Swanson 2006 and Quoreshi and Mollah 2019)
This implies that the impact of volatility in larger markets have smaller impacts on future stock index return volatility compared to the smaller stock index return volatility, the impact is persistent

Summary

Introduction

The US subprime crisis, referred to as the global financial crisis (GFC), in 2008 and the eventual Euro Zone crisis (EZC) beginning in 2009 are the most devastating financial crises in recent history. Squared stock index returns of equity in 35 markets including the USA, UK, Euro Zone, and BRICS countries are studied as a proxy for the measurement of volatility. Significant time elapsed before Bhardwaj and Swanson (2006) conducted an empirical study focusing on the usefulness of the ARFIMA model They find convincing evidence to apply ARFIMA in squared, log-squared, and absolute stock index returns. Quoreshi and Mollah (2019) develop a long memory model incorporating conditional heteroscedasticity properties and subsequently apply the model for the squared returns of stock indices using data from BRICS countries, UK and US markets. In the present study, we apply the FIMACH model to make use of the advantages it provides to investigate contagion of return volatilities in equity markets.

Data Descriptive and Correlation Analysis

Estimation

Results

Concluding Remarks