Econometrics Working Paper EWP1301 ISSN 1485-6441 Department of Economics Modelling Volatility Spillover Effects Between Developed Stock Markets and Asian Emerging Stock Markets Yanan Li & David E. Giles Department of Economics, University of Victoria September 2013 Abstract This paper examines the linkages of stock markets across the U.S., Japan and six Asian developing countries: China, India, Indonesia, Malaysia, the Philippines and Thailand over the period January 1, 1993 to December 31, 2012. The volatility spillover is modeled through an asymmetric multivariate GARCH model. We find significant unidirectional shock and volatility spillovers from the U.S. market to both the Japanese and the Asian emerging markets. It is also found that the volatility spillovers between the U.S. market and the Asian markets are stronger and bidirectional during the Asian financial crisis. Further, during the last five years, the linkages between the Japanese market and the Asian emerging markets became more apparent. Our paper contributes to the literature by examining both the long run and the short run periods and focusing on shock and volatility spillovers rather than return spillovers, which have been the primary focus of most other studies. Keywords: Volatility, Spillovers, Stock markets, Multivariate GARCH, Asymmetric BEKK model JEL Classifications: C32, C58, G1 Author Contact: David E. Giles, Dept. of Economics, University of Victoria, P.O. Box 1700, STN CSC, Victoria, B.C., Canada, V8W 2Y2; e-mail:
[email protected]; Phone: (250) 721-8540; FAX: 1. Introduction The increasing economic integration of international stock markets has become especially important over the last two decades. The substantial development of technology and the increased flow of capital between countries are among the main factors contributing to this observed globalization.