Diebold and Yimlaz, in their paper, published in 2009 and titled Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets, provided a simple and intuitive measure of interdependence between markets by measuring the returns and volatilities spillovers of 19 countries’ equity markets, an approximation of global equity markets. The goal of this paper is to extend on the original paper from three perspectives. Firstly, the original paper’s results shows markets interdependence results up to 2007, which does not capture the 2008 global financial crisis and its aftermath, and it is very interesting to see what happened during and after such unprecedented crisis, and to see what happened after other major and recent events such as the European sovereign debt crisis. Secondly, this study’s dataset adds two key players in the global economy that are having increasing prominence: Saudi Arabia and India, increasing the number of equity markets studied to 22 countries. Thirdly, this paper uses an improved model that avoids identification schemes based on Cholesky factorization, where variance decompositions calculations depend on the ordering of the variables, by using Generalized VAR, an extension they suggested in 2009 and later used in 2012 for the same purpose of this paper but studying interdependence between different asset classes instead.
MSc in Finance Project-Simon Fraser University
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