Volatility Spillovers from the Larger to Smaller Stock Market in the Context of Global Financial Crisis

Abstract

The aim of this paper is to analyze the spillover effects of larger equity
market (North American) on smaller equity market (South Asian) in the
context of Global Financial Crisis. The mathematical economic techniques
of Univariate (EGARCH) and Multivariate (VAR) models have been
incorporated to analyze the wide-ranging spillover effects of both the
markets. The empirical results immediately before and after the global
financial crisis suggest that the asset returns of larger market are having
significant impact on a smaller market, whereas the volatilities of larger
market have no significant spillover impact on the volatility of a smaller
market. The results during the era of global financial crisis are quite
captivating and in contrast with the stylized facts of volatility transmissions.
The results suggest that the asset returns of larger stock market are not
having significant impact on a smaller market whereas the volatilities of
larger market have significant but negative spillover impact on the
volatilities of a smaller market. Keeping in view the significant results of
econometric techniques during the last financial crisis, this study may serve
as a benchmark to explore the pattern of spillover between large and small
markets.