Volatility Transmission in Overlapping Trading Zones

Andreas Masuhr

No 6717, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: Previous volatility spillover models (Engle et al. 1990, Clements et al. 2015) use artificially non overlapping trading zones to identify sources of volatility transmission between these zones. The problem of non overlapping zones is overcome using a copula GARCH approach that allows for multiple overlaps between zones incorporating vine copulas to flexibly model the dependence structure and to meet stylized facts of return data. Stationarity conditions are examined and identifications problems concerning previous work, as well, are pointed out. To handle the relatively large parameter space, the model is estimated by Bayesian methods using a differential evolution MCMC (Braak 2006) approach. Simulation studies are carried out in order to ensure robustness against copula or error term misspecification and in order to analyze the identification problem.

Pages: 41 pages
Date: 2017-11
New Economics Papers: this item is included in nep-ecm
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