The Effect of 2008 Crisis on the Volatility Spillovers among Six Major Markets

Abstract

Abstract The scope of this paper is to determine whether global stock markets function differently under conditions of economic crisis by measuring volatility spillovers between six major markets, namely the US , the UK , G ermany, S pain, T urkey, and G reece. We examine the volatility spillover effects of the 2008 US financial crisis to these six major markets using daily stock returns from J anuary 2003 to D ecember 2014, before, during, and after the 2008 financial crisis. We combine the D iebold and Y ilmaz methodology with the stochastic volatility model of T aylor implemented through the sequential E fficient I mportance S ampling method of R ichard and Z hang to obtain variance decompositions derived from an estimated vector autoregressive model. The empirical findings suggest that stock markets tend to show increased volatility spillovers during the crisis period, thus resulting in lesser diversification benefits for investors.