engleski

Asymmetric spillovers on European stock markets: “good” and “bad” volatility approach

Given the increased interconnection between political and economic uncertainty and financial markets, this research observes the asymmetric shock spillovers in the economic policy uncertainty (EPU) index, stock return, and stock market realized volatility on the French, German and the UK stock markets. However, the asymmetric effects of shock spillovers between variables of interest are not much explored. That is why we divide the stock market risk into “good” and “bad” volatility in observing the spillovers between the EPU series, stock return, and risk series. The contribution to the existing literature and analysis is threefold. First, the asymmetric spillover effect between EPU and the stock market is analyzed by decomposing realized volatility into “good” and “bad” volatility. Second, from a methodology point of view, most research uses GARCH models, while in this paper ; a rolling vector autoregression (VAR) model is used. And last, by applying a dynamic estimation approach and analyzing spillovers for the tested variables, the results are more credible as opposed to the static analysis. We focus on France, Germany, and the UK markets. Results indicate that some asymmetry in the spillovers is present, which varies over time, visible in the spillover asymmetry measure. The results are robust, due to the inclusion of control variables via interest rates, inflation rate, and the global European stock market return.

Economic Policy Uncertainty ; “Good” and “Bad” Volatility ; Asymmetry Spillover ; Dynamic Analysis

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