Returns and volatility spillover in the European banking industry during global financial crisis: flight to perceived quality or contagion?

Choudhry, Taufiq and Jayasekera, Ranadeva (2014) Returns and volatility spillover in the European banking industry during global financial crisis: flight to perceived quality or contagion? International Review of Financial Analysis, 36, 36-45. (doi:10.1016/j.irfa.2014.05.003).

Abstract

This paper empirically investigate return, volatility and leverage spill over effects between banking industrial stock markets of the major economies (ME) (Germany, UK and US) and the smaller stressed European Union countries (SE), (Italy, Ireland, Greece, Spain and Portugal) from 2002 to 2014 which includes the global financial crisis period (2007-2014). Thus the paper investigates the influence of the global crisis on the spill over between the banking industrial stock markets of Europe and US. We apply a multivariate GARCH-GJR framework to investigate the effects financial crisis with respect to spill over. Our results indicate an increase in both means and volatility spill over between the major economies and the stressed EU economies from the pre-crisis to the crisis period. During the pre-crisis period there is ample evidence of spill over from the Germany, UK and US to the smaller EU economies. Little evidence of a significant spill over from the smaller economies to the major economies found during this period. Thus we find that return and volatility transmission mechanisms between the major economies and the smaller EU countries are asymmetric during the crisis period. During the crisis, the level and amount of spill over from the major economies increases. But now there is also clear evidence of spill over from smaller EU economies to the major economies also, this is especially true for Germany and the UK. Evidence of spillover effects suggest the existence of exploitable trading strategies and have important implications to investors in the areas of option pricing, portfolio optimization and risk management.

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Contributors

Author: Taufiq Choudhry

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