Volatility linkages across three major equity markets: a financial arbitrage approach

This paper investigates the high frequency behavior of US, British and German stock market exuberance using an index provided by standard portfolio arbitrage relationships. Symmetric and asymmetric multivariate GARCH models are implemented to quantify international volatility linkages between January 1992 and April 2000. A shift in volatility transmission is detected from May 1997 onwards. Empirical analysis suggests that equity markets volatility modeling with exuberance indexes is more accurate than modeling with stock returns. Exuberance volatility comovements across countries are compared with the corresponding return comovements. An interpretation of their discrepancy is provided in terms of bond and stock returns international covariation.