The assets that are connected to such risky settings will be termed a risky asset leading to market efficiency issues, especially in the situation where the person holds the risk for a certain period of time. The uncertainties hence have to be understood with respect to the asset for that period of time. Volatility knowledge is the basic requirement for estimating such uncertainties and the impact of such uncertainties. The volatility of an economic variable is basically the measure of the variable over a time period. In the context of financial assets, the volatility index is understood as the estimation of deviation from what can be normally expected for the value. In assessing assets, the deviation from the expected value like price or returns will hence be a significant measure for investors.
The concept of spillover can be understood from the work of Engle et al. (1990). According to this concept definition, spillover is of two types, the “own” and the “cross” spillover type. Spillovers act like heat waves. In nature, they are transmitted within their integrated markets and across markets. Any present volatility can be understood from the past volatility conditions. Similarly, spillovers are usually triggered from some form of a past market function. This leads to their being classified sometimes as volatility clusters. Another hypothesis when it comes to understanding spillovers like the meteor shower hypothesis. The meteor shower hypothesis states that spillovers draw from existing volatility in their market and from volatility from other market transmissions that could occur at the point of study. In the meteor shower standpoint of spillovers, it is hence assessed that both the own and cross aspect are included as part of itself.
In discussing spillovers, the “own” spilover type is perhaps the most discussed spillover phenomenon. The interdependence of markets makes it easier to understand how impact from external environment is transmitted and understood within the market. Individually, they are affected by news announcements of social, political, economic and legal contexts. While this research work discusses macroeconomic news announcements, the integration of the markets will decide whether the spillover effect studied is more meteor shower oriented or is a “own” spillover type. When markets are less integrated, then the “own” spillover type is more dominant and this is one reason that “own” spillover types are analysed and understood in detail. However, when markets are integrated to a strong extent, then the meteor shower phenomenon in spilovers could be observed.
Unconditional volatility cannot hence be defined or measured for specific time periods. Time invariance would be noticed in such context. On the other hand, in the case of conditional volatility, it is observed that the variables will change over time. The very nature of the stochastic process is that price and returns distribution of a varying nature could exist. A random distribution exists. The stochastic volatility introduces distributions that are more often observed to be a result of asymmetrical contemporaneous changes and returns, in which case there could be positive as well as negative returns. It is necessary for understanding the form of integrated upward or downward movement in the case of macroeconomic news impacts is hence a needed factor for the stock market analyst.
Understanding volatility spillovers is especially important in the context of recessions or financial crises situations. This is because every large decline in stock price will happen when a market volatility exists. The impact of macroeconomics news creates a form of leverage effect. As researchers like Wongswan (2006) note, in the context of macroeconomic news announcements it could so happen that any positive or negative effect could be even more reinforced. In integrated markets, the shock wave transmission could occur because of market recession and collapse. Therefore, market news understanding with respect to spillovers will play a major role in containing the shock or introducing a better way to understand the shock.