Emerging European Stock Markets Integration by Means of Volatility

The analyst's of the comovements of stock market returns was approached with many modeling techniques ranging from the simple and GARCH style dynamic conditional correlation to multivariate GARCH and studies of the bivariate distribution. The importance of the standardized concept of international integration and the effect on the phenomenon of contagion motivated the use of all these techniques. This paper intends to analyze the dynamics of the volatilities of the returns of the stock market indices from a series of developed and emerging European countries (Germany, France, UK, Spain, Switzerland, Italy, Portugal, Ireland, Austria, Poland, Czech Republic, Hungary, Romania and Slovenia), using different forms of computation for different frequencies (intra-day 5-minute returns, 60 minutes and daily returns). The dependence structure of the computed volatilities is first analyzed using a Vector Autoregression for all the stock markets involved, for all types of frequencies described. A Markov switching analysis on these correlations intends to provide information on the moment when changes occur in the comovements of the volatilities, throwing light on the regime shifting in the dynamics of the volatilities.