304 VOLATILITY TRANSMISSION PATTERNS BETWEEN THE USA AND SPAINThe main objective of this study is to analyze whether volatility trans-
mission patterns between the US and Spanish stock markets have changed
after September 11. In order to do this, we use a multivariate GARCH model
and take into account both the asymmetric volatility phenomenon and the
non-synchronous trading problem.
An extensive literature has explored volatility transmission across global
financial markets. Earlier studies, such as Engel, Ito and Lee (1990), Hamao,
Masulis and Ng (1990), Susmel and Engle (1994), Karolyi (1995), Darbar and
Deb (1997) and Booth, Martikainen and Tse (1997), use symmetric univariate
or multivariate GARCH models. More recent studies introduce asymmetric
multivariate GARCH models allowing volatility and covariance to be sensi-
tive to the sign and size of the innovations (see Brooks and Henry, 2000; Ng,
2000; Isakov and Perignon, 2001; Baele, 2005; Cifarelli and Paladino, 2005).
Major global events such as the crisis in the USA in 1987, Mexico in 1994,
East Asia in 1997 and Russia in 1998 have received special attention when
studying volatility transmission and correlation between countries (Hamao,
Masulis and Ng,1990; King and Wadhwani, 1990; Koutmous and Booth,
1995; and Rigobon, 2003). These studies use a sample size that includes one
or more crisis and they estimate the model for the pre-crisis and post-crisis
periods.
It must be highlighted that most existing studies on spillovers between
developed countries focus on the USA, Canada, Japan, the UK, France and
Germany.^1 As far as we know, volatility transmission between the USA and
Spain has only been studied by Peña (1992), Perez and Torra (1995) and
Fernández andAragó (2003). Peña (1992) uses a symmetric univariate model
and the others use multivariate GARCH models. All of them find volatility
transmission patterns between the USA and Spain. However, this chapter
will be the first to take into account the non-synchronous trading problem
and use a sample period that includes the September 11 terrorist attack.
Until now, few studies have examined the effects of the attacks of Septem-
ber 11 on financial markets. Most of them focus on the economy as a whole^2
or on different concrete aspects of the economy. For instance, Poteshman
(2005) analyzes whether there was unusual option market activity prior to
the terrorist attacks. Ito and Lee (2005) assess the impact of the September 11
attack on US airline demand. Glaser and Weber (2005) focus on how the
terrorist attack influenced expected returns and volatility forecasts of indi-
vidual investors. However, none of them analyzes volatility transmission
patterns and how they have been affected by the event. The only paper
which analyzes changes in interrelations between stock markets would be
Hon, StraussandYong(2004), butittestswhethertheterroristattackresulted
in an increase in correlation across global financial markets.
When studying volatility transmission between different financial mar-
kets, an important fact to take into account is the trading hours in each
market. In the case of partially overlapping markets (like Spain and