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Testing for volatility co-movement in bivariate stochastic volatility models

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Chen, Jinghui and Kobayashi, Masahito and McAleer, Michael (2017) Testing for volatility co-movement in bivariate stochastic volatility models. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 10, 2017, ISSN: 2341-2356 ] (Unpublished)

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Abstract

The paper considers the problem of volatility co-movement, namely as to whether two financial returns have perfectly correlated common volatility process, in the framework of multivariate stochastic volatility models and proposes a test which checks the volatility co-movement. The proposed test is a stochastic volatility version of the co-movement test proposed by Engle and Susmel (1993), who investigated whether international equity markets have volatility co-movement using the framework of the ARCH model.
In empirical analysis we found that volatility co-movement exists among closelylinked stock markets and that volatility co-movement of the exchange rate markets tends to be found when the overall volatility level is low, which is contrasting to the often-cited finding in the financial contagion literature that financial returns have co-movement in the level during the financial crisis.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Lagrange multiplier test; Volatility co-movement; Stock markets; Exchange rate Markets; Financial crisis
Subjects:Sciences > Mathematics > Finance
Social sciences > Economics > Depressions
Social sciences > Economics > Econometrics
JEL:C12, C58, G01, G11
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2017
Number:10
ID Code:41441
Deposited On:21 Feb 2017 09:06
Last Modified:13 Mar 2017 10:51

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