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Testing for a Common Volatility Process and Information Spillovers in Bivariate Financial Time Series Models

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Chen, Jinghui and Kobayashi, Masahito and McAleer, Michael (2016) Testing for a Common Volatility Process and Information Spillovers in Bivariate Financial Time Series Models. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 04, 2016, ] (Unpublished)

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Official URL: http://eprints.ucm.es/36253/1/1604.pdf


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Abstract

The paper considers the problem as to whether financial returns have a common volatility process in the framework of stochastic volatility models that were suggested by Harvey et al. (1994). We propose a stochastic volatility version of the ARCH test proposed by Engle and Susmel (1993), who investigated whether international equity markets have a common volatility process. The paper also checks the hypothesis of frictionless cross-market hedging, which implies perfectly correlated volatility changes, as suggested by Fleming et al. (1998). The paper uses the technique of Chesher (1984) in differentiating an integral that contains a degenerate density function in deriving the Lagrange Multiplier test statistic.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Volatility comovement, Cross-market hedging, Spillovers, Contagion.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Finance
JEL:C12, C58, G01, G11
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2016
Number:04
ID Code:36253
Deposited On:10 Mar 2016 10:28
Last Modified:10 Mar 2016 10:35

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