Advanced

The return variance of the EMU equity markets and spill over effects from short-term interest rates

HOU, Ai Jun LU (2009)
Abstract
This paper examines the spillover effects from the short term interest rates market to equity markets within the Euro area. The empirical study is carried out by estimating an extended Markov Switching GJR in mean model with a Bayesian based Markov Chain Monte Carlo (MCMC) methodology. The result indicates that stock markets in the Euro area display a significant two regimes with distinct characteristics. Within a bear market regime, stock returns have a negative relationship with the volatility, and the volatility process responds asymmetrically to negative shocks of equity returns. The other regime appears to be a bull market regime, within which the returns have a positive relationship with the volatility, and the volatility is lower... (More)
This paper examines the spillover effects from the short term interest rates market to equity markets within the Euro area. The empirical study is carried out by estimating an extended Markov Switching GJR in mean model with a Bayesian based Markov Chain Monte Carlo (MCMC) methodology. The result indicates that stock markets in the Euro area display a significant two regimes with distinct characteristics. Within a bear market regime, stock returns have a negative relationship with the volatility, and the volatility process responds asymmetrically to negative shocks of equity returns. The other regime appears to be a bull market regime, within which the returns have a positive relationship with the volatility, and the volatility is lower and more persistent. We find also that there is a significant impact of fluctuations in the short term interest rate on the conditional variance and conditional returns in the EMU countries. Such impact is asymmetrical, and it appears to be stronger in the bear market and when interest rate changes upward. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
submitted
subject
keywords
Short term interest rates, EMU stock markets, GJR-M, MCMC, Markov Switching
pages
53 pages
language
English
LU publication?
yes
id
6048b1bf-8429-486c-b4a5-9623aaba99bc (old id 1763393)
date added to LUP
2011-01-21 15:04:01
date last changed
2016-04-16 12:04:50
@misc{6048b1bf-8429-486c-b4a5-9623aaba99bc,
  abstract     = {This paper examines the spillover effects from the short term interest rates market to equity markets within the Euro area. The empirical study is carried out by estimating an extended Markov Switching GJR in mean model with a Bayesian based Markov Chain Monte Carlo (MCMC) methodology. The result indicates that stock markets in the Euro area display a significant two regimes with distinct characteristics. Within a bear market regime, stock returns have a negative relationship with the volatility, and the volatility process responds asymmetrically to negative shocks of equity returns. The other regime appears to be a bull market regime, within which the returns have a positive relationship with the volatility, and the volatility is lower and more persistent. We find also that there is a significant impact of fluctuations in the short term interest rate on the conditional variance and conditional returns in the EMU countries. Such impact is asymmetrical, and it appears to be stronger in the bear market and when interest rate changes upward.},
  author       = {HOU, Ai Jun},
  keyword      = {Short term interest
rates,EMU stock markets,GJR-M,MCMC,Markov Switching},
  language     = {eng},
  note         = {Working Paper},
  pages        = {53},
  title        = {The return variance of the EMU equity markets and spill over effects from short-term interest rates},
  year         = {2009},
}