Intra-Daily Volatility Spillovers between the US and German Stock Markets

Abstract

Using a novel three-phase model based upon a conditional autoregressive Wishart (CAW) framework for the realized (co)variances of the Dow Jones and the German stock index DAX, we analyze intra-daily volatility spillovers between the US and German stock markets. The proposed model explicitly accounts for three distinct intraday periods resulting from the non-synchronous and partially overlapping opening hours of the two markets. We find evidence of significant short-term volatility spillovers from one intra-day period to the next within both markets ('heat-wave effects') as well as across the two markets ('meteor-shower effects').Furthermore, we find that during the subprime crisis the general persistence of short-term volatility shocks is substantially higher and the spillovers effects between the US and the German stock markets are significantly larger than before the crisis, indicating substantial volatility contagion effects.

Keywords: Conditional autoregressive Wishart model, Impulse Response Analysis, Observation-driven models, Realized covariance matrix

JEL Classification: C32, C51, G15