Capturing volatility and its spillover in South Asian countries


  • Ruchika Gahlota Assistant Professor, Maharaja Surajmal Institute, C-4, Janak Puri, New Delhi-110058, India



C GARCH M, Granger Causality, Risk premium, Recession, Volatility spillover.


This paper intends to study volatility and its spillover among South Asian Countries through use of Granger causality test. Using the daily closing prices of major index of each country in South Asia, the Granger causality and C GARCH M models asses the impact of recession on the nature of volatility by decomposing the long period into two sub periods. The study finds significant bidirectional causality between Stock market of U.S. and India for both short terms as well as for long term which is not disturbed by recession. But the recession has changed causal relation among other countries. The recession has created higher shock impact on the permanent component of the volatility of stock market of all South Asian countries. It is also observed that volatility of all South Asian countries is of long term nature. In addition, the observed spillover effects are unstable over time in the sense that the spillover changed its nature after beginning of recession.


Alom, M. F., Ward, B. D. and Hu, B. (2010). Cross country mean and volatility spillover effects of food prices: evidence for Asia and Pacific, International Review of Business Research Papers, 6 (5), 334 – 355.

Arshanapalli, B. and Doukas, J. (1993). International stock market linkages: evidence from the pre– and post–October 1987 period, Journal of Banking and Finance, 17, 193–208.

Baele, L., Ferrando, A., Hordahl, P., Krylova, E., and Monnet, C. (2004). Measuring European financial integration, Oxford Review of Economic Policy, 20(4), 509-530.

Baur, D., and Jung, R. C. (2006). Return and volatility linkages between the US and the German stock market, Journal of International Money and Finance, 25, 598–613.

Bekaert, G. and Harvey, C.G. (1997), Emerging equity market volatility, Journal of Financial Economics, 43, 29-77.

Cheung, Y. W. and Ng, L. K. (1992). Interactions between the U.S. and Japan stock market indices. Journal of International Financial Markets, Institutions, and Money, 2, 51–70.

Christianse, C. (2003). Volatility-spillover effects in European bond market”, working paper, Aarhus School of Business, Denmark.

Christoffersen, P., Jacobs, K.., Ornthanalai, C. and Wang, Y. (2008). Option valuation with long-run and short-run volatility components, Journal of Financial Economics, 90, 272-297.

Dickey, D. A., and Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root, Econometrica, 49 (4), 1057–72.

Du, X., Yu, C. and Hayes. D. (2011). Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis, Energy Economics, 33(3), 497-503.

Engle, R. (1982). Autoregressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation, Econometrica, 50(4), 987-1006.

Engle, R.F., and Lee, G. (1999). A Long-run and short-run component model of stock return volatility, In: Engle, R. and H. White, (Eds.), Cointegration, Causality and Forecasting. Oxford: Oxford University Press.

Errunza, V. and Losq, E. (1985). International asset pricing under mild segmentation: theory and tests, Journal of Finance, 40, 105-124.

Eun, C., & Shim, S. (1989). International transmission of stock market movements, Journal Financial and Quantitative Analysis, 24(2), 241–256.

Forbes, K. J. and Rigobon, R. (2002). No contagion, only interdependence: measuring stock market comovements, Journal of Finance, 57, 2223-2261.

Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral method”, Econometrica, 37(3), 424-438.

Masulis, R.W., Hamao, Y. and Ng, V. (1990). Correlations in price changes and volatility across international stock markets, Review of Financial Studies, 3, 281-307.

Hilliard, J. (1979). The relationship between equity indices on world exchanges, Journal of Finance, 34, 103–114.

Janakiramanan, S. and Lamba, A. S. (1998). An empirical examination of linkages between Pacific-Basin stock markets, Journal of International Financial Markets, Institutions and Money, 8, 155 -173

King, M., Sentana, E. and Wadhwani, S. (1994). Volatility and links between national stock markets, Econometrica, 62(4), 901-933.

King, M.A. and Wadhwani, S. (1990). Transmission of volatility between stock markets, The Review of Financial Studies, 3(1), 5-33.

Liu, Y.A. and Pan, M-S (1997). Mean and volatility spillover effects in the U.S. and Pacific–Basin stock markets, Multinational Finance Journal, 1(1), 47–62.

Malliaris, A. G. and Urrutia, J. L. (1992). The international crash of October 1987: causality tests, Journal of Financial and Quantitative Analysis, 27, 353–364.

Miyakoshi, T. (2003). Spillovers of stock return volatility to Asian equity markets from Japan and the US. Journal of International Financial Markets, Institutions and Money, 13(4), 383–99.

Ng, A. (2000). Volatility spillover effects from Japan and the US to the Pacific-Basi”, Journal of International Money and Finance, 19, 207-233.

Park, J. and Fatemi, A.M. (1993). The linkages between the equity markets of Pacific-Basin countries and those of the U.S., U.K., and Japan: A vector autoregression analysis, Global Finance Journal, 4(1), 49-64.

Pisedtasalasai, A. and Harris, R.D.F. (2006). Return and volatility spillovers between large and small stocks in the UK, Journal of Business Finance and Accounting, 33 (9&10), 1556-1571.

Reyes, M. G. (2001). Asymmetric volatility spillover in the Tokyo stock exchange, Journal of Economics and Finance 25(2), 206-213.

Susmel R., and Engle, R. F. (1994). Hourly volatility spillovers between international equity markets, Journal of International Money and Finance, 13, 3–25.

Theodossiou, P., and Lee, U. (1993). Mean and volatility spillovers across major national stock markets: Further empirical evidence, Journal of Financial Research, 16, 337–350.

Wang, S.S., Rui, O.M. and Firth, M., (2002). Return and volatility of dually-traded stocks: the case of Hong Kong, Journal of International Money and Finance, 21, 265-293.

Wei, C.C. (2009). Using the Component GARCH modeling and forecasting method to determine the effect of unexpected exchange rate mean and volatility spillover on stock markets, International Research Journal of Finance and Economics, 23, 62-74.

Wei, K. C. J., Liu, Y. J., Yang, C. C. and Chaung, G. S. (1995). Volatility and price change spillover effects across the developed and emerging markets, Pacific–Basin Finance Journal, 3, 113–136.

Worthington, A., Adam, K-S. and Higgs, H.(2005). Transmission of prices and price volatility in Australian electricity spot markets: a multivariate GARCH analysis, Energy Economics - ENERG ECON , 27 (2), 337-350.

Yang, S. and Doong, S. (2004). Price and volatility spillovers between stock prices and exchange rates: Empirical evidence from the G-7 countries, International Journal of Business and Economics, 3(2), 139-153.