Risk Contagion Among International Stock Markets

The authors develop a model of stochastic volatility with jump to analyze the risk spillover from the US market and the regional (European) market to the European equity markets. The key advantage of this approach comparing to the earlier approaches is that it enables them to identify jumps and investigate spillover of extreme events across borders. The model allows for time-varying parameters by relating the spillover parameters to the countries' degree of integration. They use Wavelet to filter out all the short-term variations in the variables measuring country integration. They find that a large part of the country jumps are due to the US and regional markets.