A multi-country analysis of the 2007–2009 financial crisis: empirical results from discrete and continuous time models

Abstract

In this article, we provide empirical evidence of the recent financial crisis over 2007–2009 using discrete time multivariate GARCH (MGARCH) models and continuous time modelling approaches. Using daily data for 14 countries, we investigate the return and volatility spillovers among the US and other international markets. The MGARCH results reveal positive return spillovers from the US to a number of markets, and volatility transmission is verified. The US market is prone to return and volatility transmission from a limited number of markets. The continuous time analysis finds evidence of feedback effects in some cases. Evidence shows that spillover effects intensified during the financial crisis.

Keywords:

• continuous time
• spillovers
• multivariate GARCH
• Gaussian estimation
• time series

JEL Classification:

• G15
• C30

Notes

1 We have tested alternative GARCH specifications for the models for Germany and Iceland to alleviate the nonstationarity issue. In all cases, the persistence metrics remained above unity. The summary statistics for both series (see Tables 1 and 2) show that the returns of Germany and Iceland exhibit an excessive kurtosis figure. This might be due to the high negative returns (outliers) that both series exhibit in October 2008 and could be related to the global financial crisis and the Icelandic banking crisis.

2 See footnote 1.