Volatility Spillovers from the US to Australia and China across the GFC

Abstract

This paper features an analysis of volatility spillover eects from the US market, represented by
the S&P500 index to the Australian capital market as represented by the Australian S&P200 for
a period running from 12th September 2002 to 9th September 2012. This captures the impact of
the Global Financial Crisis (GFC). The GARCH analysis features an exploration of whether there
are any spillover eects in the mean equations as well as in the variance equations. We adopt a
bi-mean equation to model the conditional mean in the Australian markets plus an ARMA model
to capture volatility spillovers from the US. We also apply a Markov Switching GARCH model to
explore the existence of regime changes during this period and we also explore the non-constancy
of correlations between the markets and apply a moving window of 120 days of daily observations
to explore time-varying conditional and tted correlations. There appears to be strong evidence of
regime switching behaviour in the Australian market and changes in correlations between the two
markets particularly in the period of the GFC. We also apply a tri-variate Cholesky-GARCH model
to include potential eects from the Chinese market, as represented by the Hang Seng Index