Quantifying Interactions among European Equity Markets with Time-Varying Conditional Skewness


  • Cian E Twomey J.E. Cairnes School of Business & Economics, NUI Galway, Ireland




Asymmetries, Skewness, Volatility, Spillovers, Stock returns


This paper explores the influence of global and regional factors on the conditional distribution of daily stock returns in four European markets – the U.K., Germany, France, and Spain - using factor models in which unexpected returns comprise global, regional and local shocks. Besides conditional heteroscedasticity, the model innovates by allowing shocks to incorporate time-varying conditional skewness, which is found to increase the explanatory power of our modelling. The relative importance of the global and regional factors varies across the four markets, with the largest, most international market (the U.K.) being more dependent on global factors as compared to the regional importance for the Spanish market. Also, the global factor is relatively less important for market volatility in models that permit time-varying conditional skewness. 

Author Biography

Cian E Twomey, J.E. Cairnes School of Business & Economics, NUI Galway, Ireland

Lecturer in Financial Economics


Harvey, C. R. and Siddique, A. (1999), “Autoregressive Conditional Skewness,” Journal of Financial and Quantitative Analysis, 34, 465-487. https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/div-classtitleautoregressive-conditional-skewnessdiv/1A8FA5EB3AF111F0A1B5DF2EC0B8E0B2#

Harvey, C. R. and Siddique, A. (2000), “Conditional Skewness in Asset Pricing Tests,” Journal of Finance, 55, 1263-1295 https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P56_Conditional_skewness_in.pdf

Harvey, C.R., Liechty, J. C., Liechty, M.W, and Muller, P. (2010), “Portfolio Selection with Higher Moments,” Quantitative Finance, 10: 5, 469-485 https://www.tandfonline.com/doi/full/10.1080/14697681003756877?src=recsys

DeMiguel, V., Plyakha, Y, Uppal, R. and Vilkov, G. (2013). “Improving Portfolio Selection using Option-Implied Volatility and Skewness,” Journal of Finance and Quantitative Analysis, 48:6, 1813-1845 http://faculty.london.edu/avmiguel/DPUV-JFQA-2014.pdf

Bekaert, G. and Harvey, C. R. (1997), “Emerging Equity Market Volatility,” Journal of Financial Economics, 43, 29-77 https://ideas.repec.org/a/eee/jfinec/v43y1997i1p29-77.html

Hamao, Y., Masulis, R. W. and Ng, V., (1990), “Correlations in Price Changes and Volatility across International Stock Markets”, Review of Financial Studies 3, 2, 281-307. https://www.tandfonline.com/doi/full/10.1080/1350485042000203850?src=recsys

Ng, Angela (2000), “Volatility Spillover Effects from Japan and the US to the Pacific-Basin”, Journal of International Money and Finance, 19, 207-233. https://econpapers.repec.org/article/eeejimfin/v_3a19_3ay_3a2000_3ai_3a2_3ap_3a207-233.htm

Forbes, K.J, and Chinn, M.D. (2004). “A Decomposition of Global Linkages in Financial Markets over time,” The Review of Economics and Statistics, 86:3, 705-722. http://web.mit.edu/kjforbes/www/Papers/DecompositionOfGlobalLinkagesInFinancialMarkets-Restat.pdf

Heston, S.L. and Rouwenhorst, K. (1994). “Does industrial structure explain the benefits of international diversification?” Journal of Financial Economics, 36:1, 3-27. https://ideas.repec.org/a/eee/jbfina/v34y2010i1p236-245.html

Fratzscher, M. (2001). “Financial Market Integration in Europe: On the Effects of Emu on Stock Markets”, ECB Working Paper No. 48. https://ideas.repec.org/p/ecb/ecbwps/20010048.html

Nelson, D.B. (1991). “Conditional Heteroscedasticity in Asset Returns: A New Approach”, Econometrica, 59:2, 347-70. https://econpapers.repec.org/article/ecmemetrp/v_3a59_3ay_3a1991_3ai_3a2_3ap_3a347-70.htm

Glosten, L.R., Jagannathan, R. and Runkle, D.E. (1993). “On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks”, Journal of Finance, 48:5, 1779-1801. https://faculty.washington.edu/ezivot/econ589/GJRJOF1993.pdf

Engle, R.F. and Ng, V.K. (1993). “Measuring and Testing the Impact of News on Volatility”, Journal of Finance, 48:5, 1749-1778. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1993.tb05127.x

Peiro, A. (1999). “Skewness in Financial Returns”, Journal of Banking & Finance, 23:6, 847-862. https://ideas.repec.org/a/eee/jbfina/v23y1999i6p847-862.html

Lempériere, Y, Deremble, C., Nguyen, T, Seager, P, Potters, M. and Bouchard, J.P. (2017) “Risk Premia: Asymmetric Tail Risks and Excess Returns” Journal of Quantitative Finance, 17, 1-14. https://www.tandfonline.com/doi/abs/10.1080/14697688.2016.1183035

Longin, F. and Solnik, B. (2002). “Extreme Correlation of International Equity Markets,” Journal of Finance, 56:2, 649-676. https://onlinelibrary.wiley.com/doi/full/10.1111/0022-1082.00340

Ang, A. and Bekaert, G. (2002). “International Asset Allocation with Regime Shifts”, , 15:4, 1137-1187. https://academic.oup.com/rfs/article/15/4/1137/1568247

Chen, J., Hong, H. and Stein, J. C. (2000), “Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices,” Journal of Financial Economics, 61, 345-381. https://econpapers.repec.org/article/eeejfinec/v_3a61_3ay_3a2001_3ai_3a3_3ap_3a345-381.htm

Perez-Quiros, G. and Timmermann, A. (2001), “Business Cycle Asymmetries in Stock Returns: Evidence from Higher Order Moments and Conditional Densities”, Journal of Econometrics, 103, 259-306. https://ideas.repec.org/a/eaa/ijaeqs/v4y2007i2_6.html

El Babsiri, M. and Zakoian, J-M. (2001). “Contemporaneous Asymmetry in GARCH processes,” Journal of Econometrics, 101:2, 257-294. https://ideas.repec.org/a/eee/econom/v101y2001i2p257-294.html

Hansen B. E. (1994), “Autoregressive Conditional Density Estimation,” International

Economic Review, 35, 705-730. https://www.jstor.org/stable/2527081




How to Cite

Twomey, C. E. (2018). Quantifying Interactions among European Equity Markets with Time-Varying Conditional Skewness. Archives of Business Research, 6(8). https://doi.org/10.14738/abr.68.5037