Volatility and Contagion Effect from US and GIIPS to the Largest European Economies

Abstract: This research paper explores the nature of the mean and volatility spillovers from the US and aggregate GIIPS to the largest GDP countries for the EMU and non-EMU countries. I develop a three step univariate volatility spillover model followed by Christiansen (2007) and Ng (2000) to analyze the relevance of local (own country), regional (aggregate GIIPS) and global (US) shocks. Empirical evidence supports the existence of asymmetric spillover effects, which subsequently leads to a higher return volatility than a positive shock of equal magnitude. I find that that both regional and global shocks are relevant for the European equity markets volatility, but global factors tend to have a greater impact. Also, in the Subprime crisis sample, the EMU countries suffer from a strong GIIPS mean and volatility spillover effects. Finally, the Conditional Spillover shows the relevance of the time varying information variables included in the model as a mean and volatility drivers from US and GIIPS in the countries under consideration. These findings are extremely relevant for financial economists and international portfolio managers when defining their optimal portfolio asset allocation decisions.