International transmission mechanism of stock market volatilities

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Latin American Business Review


We investigate the volatility spillover effects of European equity markets to the equity markets of Mexico, Brazil, and Chile. The results of the E-GARCH and VAR models suggest that the stock markets of Spain and Germany have stronger volatility spillover effects on Latin American markets than do Italy, the United Kingdom, and France. We find that these spillover effects of Spain and Germany have a greater impact on Mexico and Brazil than on Chile. Moreover, in all these cases negative innovations increase volatility more than do positive innovations. We tie our results to the relative degree of openness of Latin American countries and their level of international trade with the European economies. Mexico and Brazil are relatively more open economies than is Chile. Also, these two Latin American economies have higher levels of international trade with Spain and Germany than with other European economies. Our results are consistent with the notion that, as an economy becomes more open and integrated with the world economy, its financial sector becomes more susceptible to external shocks. © 2008 by The Haworth Press. All rights reserved.

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