Reexamining the Time-varying Volatility Spillover Effects: A Markov Switching Causality Approach
Tingguo Zheng, Haomiao Zuo
North American Journal of Economics and Finance
#002202 20131014 (published)
This paper intends to examine the volatility spillover effect betweenselective developed markets including U.S., U.K., Germany, Japanand Hong Kong over the sample period from 1996 to 2011. Weintroduce a Markov switching causality method to model thepotential instability of volatility spillover relationships over mar-ket tranquil or turmoil periods. This method is more flexible as noprior information on the changing points or size of sample win-dow is needed. From the empirical results, we find the evidenceof the existence of spillover effects among most markets, and thebilateral volatility spillover effects are more prominent over tur-moil or crisis episodes, especially during Asia crisis and subprimemortgage crisis periods. Moreover, the distinct role of each marketis also investigated.
JEL-Codes: C32, C53, C58
Keywords: Volatility spillover, Markov switching, Granger causality, Range

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