Sudden shifts in variance in the Spanish market: persistence and spillover effects

Abstract

In this paper we use the Iterated Cumulative Sums of Squares (ICSS) algorithm to detect sudden changes in variance in the Spanish stock Market. However, we employ an alternative methodology based on an EGARCH model to better capture the asymmetric behavior of the stock markets. We also use these sudden shifts to analyze the information spillovers between large and small cap portfolios. The results of this study show a significant decrease in the volatility persistence of both portfolios when sudden changes are taken into account. Spillover effects are also reduced but, in contrast with most of the previous evidence, we find a feedback relationship between the large and small portfolios. In this paper we shed some light on the understanding of the stock market by suggesting a common behavior of the portfolios. This results may be valid for a great number of markets and useful for the building of accurate asset pricing models or forecasting volatilities.

Notes

¹Nieto (2004) find that the size factor is not significant when analyses the Fama and French (1993) model for the Spanish stock market.