Business activity and business confidence: a new volatility transmission relationship

The purpose of this study is to examine the transmission of volatility between business confidence index and stock market indices in Greece. The country remains the riskiest project in European Union (EU) and previous studies fail to reach an accurate conclusion regarding the direction of this transmission.

The study covers the period from January 2013 to August 2022 in monthly basis where important economic events occur. Considering that these economic events derive strong volatility moments, the authors adopt a new methodology that measures the transmission of volatility with higher precision. This is the generalized spillover analysis by Diebold and Yilmaz (2009, 2012).

The results indicate that Business Confidence Index (BCI) is the main receiver of volatility spillovers in Greece under all aspects of the used methodology. The specificity of the results shows that business activity through a green growth model is what drives investor confidence and then their activities.

Although a handful of studies have considered the transmission of volatility between BCI and stock market indices, this study contributes in several ways. This study focuses on one country (Greece), avoiding the dispersion of the results from the examination of the relationship in several countries. The used country remains the riskiest project in EU even nowadays, while other studies fail to confirm the main direction of volatility spillovers from business confidence to stock returns. This study covers a period that is ignored by previous studies and includes important economic events. In addition, considering that these economic events derive strong volatility moments, a new methodology is adopted in this field of research that measures the transmission of volatility with higher accuracy.