The study of volatility inter-dependence provides useful insights into how information is transmitted and disseminated across markets. Research results in this area have implications for international diversification and market efficiency. This paper explores volatility spillovers between the Australian and New Zealand stock markets. The objective of the paper is to determine if volatility surprises in one market influence the volatility of returns in the other market. The existing literature in this area has typically focused on the US market's influence and employed standard ARCH class models to account for the time-variation in volatility. This paper focuses on the trans-Tasman markets and utilises more complex models which allow for an asymmetric response of volatility to past innovations. Time-zone differences in trading hours between Australia and New Zealand are analysed and four models are developed to test for spillover effects. The overnight return (& volatility) from the US market is used to account for the impact of international news. The results indicate that volatility surprises in the larger Australian market influence the subsequent conditional volatility of the smaller New Zealand market. Similarly, the Australian market also appears to be influenced by volatility surprises from the New Zealand market. However, this latter finding is also consistent with contemporaneous market reactions to international news which the daily data set used in this study is unable to isolate.
