Abstract

MEASURING RETURN AND VOLATILITY SPILLOVERS IN EURO AREA FINANCIAL MARKETS

Dimitrios P. Louzis

Bank of Greece

ABSTRACT

This study examines the return (price) and volatility spillovers among the money, stock, foreign exchange and bond markets of the euro area, utilizing the forecast-error variance decomposition framework of a generalized VAR model proposed by Diebold and Yilmaz (2012) [Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 23, 57-66]. 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, indicating that, on average, more than the 50% of the forecast-error variance of the respective VAR model is explained by spillover effects. Moreover, the stock market is identified as the main transmitter of both return and volatility spillovers even during the current sovereign debt crisis. With the exception of the period 2011-2012, bonds of the periphery countries under financial support mechanisms are receivers of return spillovers, whereas, they transmit volatility spillovers to other markets diachronically. Finally, we identify the key role of money market in volatility transmission in the euro area during the outbreak of the global financial crisis.

Keywords: Asset markets, Spillovers, Vector Autoregressive, Euro area, Financial Crisis.

JEL Classifications: G01, G10, G20, C53.

Acknowledgements: I am grateful to Heather Gibson, Eythimios Gatzonas, Kostas Zavandis and George Kaoudis for their constructive comments. The views expressed in this paper do not necessarily represent Bank of Greece.

Correspondence:

Financial Stability Department

Dimitrios P. Louzis

Bank of Greece

3 Amerikis Str.,

105 64, Athens, Greece