SPILLOVER OF VOLATILITY ON THE FINANCIAL MARKETS; M-GARCH INSIGHTS FROM PRE- AND POST-CRISIS PERIODS IN EU COUNTRIES

Abstract:This research aims to investigate whether increased volatility occurs within the government bond market, stock market, and foreign exchange market during periods of crisis, using European Union countries as a case study. Additionally, this paper explores whether there are variations in the strength and dynamics of correlations among these three markets before and after the onset of the global economic crisis. Recognizing the global significance of the Lehman Brothers’ collapse as the official commencement of the crisis, this analysis is divided into two distinct periods. The first period scrutinizes the volatility within these three markets from January 1, 2005, to September 14, 2008. The second period covers the period from September 15, 2008, to December 31, 2016. To conduct this investigation, it is employed Engel’s Dynamic Conditional Correlation (DCC) Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MGARCH) model. This model is instrumental in examining the relationships between volatilities originating from multiple markets concurrently, enabling the estimation of conditional and time-varying correlations and covariances among different markets. Using an appropriate MGARCH (1,1) model, it is assessed the intensity and direction of the conditional correlation between the government bond market, stock market, and foreign exchange markets for European Union countries before and after the official commencement of the global economic crisis.

 

Keywords: volatility, financial markets, MGARCH (1,1) model, global economic crisis