Measuring the Spillover Effects from the Stock Market Volatility in Selected Major Economies to the Stock Market Volatility in the United Kingdom

This study investigates volatility spillovers from the stock markets of the United States, Germany, China, and Japan to the UK stock market using daily data from major benchmark indices (FTSE 100, S&P 500, DAX, Shanghai Composite, and Nikkei 225) and Brent crude oil prices. Using a novel two-stage bootstrap framework, we first model time-varying conditional volatilities with GARCH-family models and compare them with long-memory FIGARCH specifications to account for persistent volatility dynamics. These volatilities are then incorporated into a VAR-X model, treating Brent crude oil price volatility as an endogenous or exogenous variable in robustness checks. To overcome limitations of traditional VARs, bootstrap-corrected GIRFs are employed to trace dynamic, order-invariant impacts across key sub-periods: the global financial crisis, Brexit, COVID-19, and the Ukraine war. We also benchmark our results against the Diebold–Yilmaz connectedness index and conduct rigorous out-of-sample forecasting and Value-at-Risk backtesting. Results reveal heterogeneous spillovers: US and German shocks trigger strong, immediate, and persistent UK market volatility, reflecting deep integration; Chinese shocks are delayed and gradual, while Japanese shocks are muted or short-lived. Spillover intensity is time-varying, peaking during global crises. Our model outperforms standard benchmarks in out-of-sample volatility forecasting and risk management applications. The study offers critical insights for investors seeking international diversification and for policymakers aiming to manage systemic risk in an interconnected global financial system.