CORRELATION AND VOLATILITY TRANSMISSION ACROSS INTERNATIONAL STOCK MARKETS: A BIVARIATE GARCH ANALYSIS

The study empirically examines correlation and volatility transmission across international stock markets by employing Bivariate GARCH model. The study uses weekly data for major five stock indices such as S&P 500, BSE 30, FTSE 100, Nikkei 225 and Ordinary share price index from 3th January, 2000 to 30th November, 2009. Long run and short run integration are investigated through Johansen cointegration and Vector error correction models respectively. The results of Johanson test show that long run integration is found across international stock indices prices. Further, results suggests that any external news arrives simultaneously received by US and Japan stock markets and then transmits to other Asian and European stock markets. The results of bivariate GARCH model reveal that there is bidirectional volatility spillover between US and Indian stock markets. This is due to fact that these two economies are strongly integrated through international trade, foreign direction investment (FDI) and foreign portfolio investment. Finally, results show that a unidirectional volatility spillover from Japan and United Kingdom to India.