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Volatility Spillovers Across the Tasman
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by Timothy J. Brailsford
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Abstract
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The study of volatility inter-dependence provides useful insights
into how information is transmitted and disseminated across
markets. Research results in this area have implications for
international diversification and market efficiency. This paper
explores volatility spillovers between the Australian and New
Zealand stock markets. The objective of the paper is to determine
if volatility surprises in one market influence the volatility of
returns in the other market. The existing literature in this area
has typically focused on the US market's influence and employed
standard ARCH class models to account for the time-variation in
volatility. This paper focuses on the trans-Tasman markets and
utilises more complex models which allow for an asymmetric
response of volatility to past innovations. Time-zone differences
in trading hours between Australia and New Zealand are analysed
and four models are developed to test for spillover effects. The
overnight return (& volatility) from the US market is used to
account for the impact of international news. The results indicate
that volatility surprises in the larger Australian market
influence the subsequent conditional volatility of the smaller New
Zealand market. Similarly, the Australian market also appears to
be influenced by volatility surprises from the New Zealand market.
However, this latter finding is also consistent with
contemporaneous market reactions to international news which the
daily data set used in this study is unable to isolate.
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Keywords
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STOCK MARKET; VOLATILITY; SPILLOVERS; ARCH.
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Contact Details
Tim Brailsford
Department of Accounting and Finance
University of Melbourne
Parkville
Victoria 3052
E-mail: t.brailsford@EcoAccFin.unimelb.edu.au
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This paper has benefited from the constructive comments of Jerry
Bowman, Rob Brown, Robert Faff, Keith McLaren, Stephen J. Taylor,
two anonymous referees and the area editor (Justin Wood). The
author is grateful for the financial assistance provided by the
ARC Small Grants scheme.
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