Stock market volatility transmission: evidence from North America.

Abstract

We attempt to model return volatility dynamics between the three equity markets of North America, namely U.S., Canada and Mexico. We employ two different techniques; the first one uses the impulse response functions from a VAR model for the conditional variances extracted from univariate GARCH models, while the second one calculates the volatility impulse response functions directly from the vec-transformation of a VAR-BEKK model. Our first approach suggests bidirectional spillover effects for all three countries. Bivariate BEKK models suggest bidirectional spillovers effects for the U.S. and Canada, and unidirectional from Mexico to the US and Canada. The trivariate BEKK model limits direct spillover effects to one pair (from Mexico to Canada) and indirect spillover effects to two pairs (from Mexico to Canada and from the U.S. to Canada).