Research Paper No. 676

LINEAR AND NON-LINEAR TRANSMISSION OF EQUITY RETURN VOLATILITY: EVIDENCE FROM THE US, JAPAN AND AUSTRALIA

by

Chris Brooks & Olan T. Henry

February 1999

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

This paper examines the transmission of shocks between the US, Japanese and Australian equity markets. Tests for the existence of linear and non-linear transmission of volatility across the markets are performed using parametric and non-parametric techniques. In particular the size and sign of return innovations are important factors in determining the degree of spillovers in volatility. It is found that a multivariate asymmetric GARCH formulation can explain almost all of the non-linear causality between markets. These results have important implications for the construction of models and forecasts of international equity returns.
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