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

• DOI: http://doi.org/10.1111/irfi.12071
• Date: 01 March 2016
• Author: Serda Selin Ozturk,Kübra Akca
• Published date: 01 March 2016

The Effect of 2008 Crisis on the

Volatility Spillovers among Six

Major Markets

KÜBRA AKCA AND SERDA SELIN OZTURK

Economics, Istanbul Bilgi University, Istanbul, Turkey

ABSTRACT

The scope of this paper is to determine whether global stock markets func-

tion differently under conditions of economic crisis by measuring volatility

spillovers between six major markets, namely the US, the UK, Germany,

Spain, Turkey, and Greece. We examine the volatility spillover effects of the

2008 US financial crisis to these six major markets using daily stock returns

from January 2003 to December 2014, before, during, and after the 2008

financial crisis. We combine the Diebold and Yilmaz methodology with the

stochastic volatility model of Taylor implemented through the sequential

Efficient Importance Sampling method of Richard and Zhang 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.

I. INTRODUCTION

Volatility spillover applies to the spread of market disturbances from one stock

to another, a process observed through movements in stock prices. Returns in

the market are characterized by high volatility. That is, returns appear volatile to

both downside and upside risks. According to the portfolio theory proposed by

Markowitz (1952), investors should increase their investment proficiency by

analyzing their portfolios with regard to the greatest return at the lowest

possible risk. Correlations between investment objects are the key of an effective

investment allocation in this theory. Hence, an accurate characterization of

volatility spillovers and risk diversification are very important for financial

hedging, portfolio management and asset allocation. Stock markets of two

countries can be highly correlated due to strong financial, economic ties and

similarities in macroeconomic policies, and this correlation can increase greatly

during crises. In that case, investing in highly correlated (integrated) stock

markets results in limited diversification benefits to investors.

In the last decade, the volatility spillover literature has been growing

immensely. One part of the literature concentrates on the linkages among

sectors in the same country and the other part concentrates on the linkages

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DOI: 10.1111/irfi.12071

© 2015 International Review of Finance Ltd. 2015

International Review of Finance, 16:1, 2016: pp. 169–178