Structural breaks in volatility spillovers between international financial markets: Contagion or mere interdependence?

This paper conducts an investigation of volatility transmission between stock markets in Hong Kong, Europe and the United States covering the time period from 2000 up to 2011. Using intra-daily data we compute realized volatility time series for the three markets and employ a Heterogeneous Autoregressive Distributed Lag Model as our baseline econometric specification. Motivated by the presence of various crisis events contained in our sample, we detect time-variation and structural breaks in volatility spillovers. Particularly during the financial crisis of 2007, we find effects consistent with the notion of contagion, suggesting strong and sudden increases in the cross-market synchronization of chronologically succeeding volatilities. Investigating the role of mean breaks and conditional heteroskedasticity in the realized volatilities, however, we find the latter to be the main driver of breaks in volatility spillovers. Taking the volatility of realized volatilities into account, we find no evidence of contagion anymore.