Measuring spillover effects in Euro area financial markets: a disaggregate approach

Abstract

This study examines the return (price) and volatility (uncertainty) spillovers among the money, stock, foreign exchange and bond markets in the Euro area. The analysis is conducted in a disaggregated manner with respect to the bond and stock indices and utilizes the generalized forecast error variance decomposition framework of a VAR model proposed by Diebold and Yilmaz (Int J Forecast 23:57–66, 2012). The asymptotic distribution of the generalized forecast error variance decomposition components and the corresponding standard errors are also derived. Our empirical results, based on a data set covering a twelve-year period (2000–2012), suggest a high level of total return and volatility spillover effects throughout the sample period. Stock markets across the Euro area countries are identified as the main transmitters of price spillovers, with the periphery countries transmitting the largest amount of spillovers during the crisis periods. Stock markets also play a key role in uncertainty transmission, but now, the propagation mechanism includes the core Euro area countries, which transmit volatility spillovers diachronically. The money, FX and bond markets are constant receivers of spillovers, with the exception of the Greek bonds, which transmitted spillovers during the peak of the Greek sovereign debt crisis in 2011–2012.