AN ANALYSIS OF THE CONDITIONAL VOLATILITY DYNAMICS OF THE AUSTRALIAN BUSINESS CYCLE

Kin-Yip Ho, Albert Tsui and Zhaoyong Zhang
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Kin-Yip Ho: Department of Economics, Colgate University

Journal of Economic Development, 2007, vol. 32, issue 2, 157-182

Abstract: In this paper, we analyse the conditional variance of the Australian real gross domestic product (GDP) and the expenditure components by a variety of generalised autoregressive conditional heteroskedasticity (GARCH) models. First, we test the plausibility of the constant-correlation assumption by employing Tse¡¯s (2000) Lagrange Multiplier (LM) test and the Bera and Kim¡¯s (2002) Information Matrix (IM) test. Our results indicate that the correlations among the shocks to real GDP and its various expenditure components are invariant over time. In addition, these shocks are not highly correlated with one another. Second, we examine if volatility asymmetry exists in the Australian business cycle by proposing four bivariate asymmetric GARCH specifications. Except for the case of gross fixed capital formation, the evidence of asymmetric conditional volatility in the growth rates of the Australian real GDP and the other components is weak. Despite the weak evidence of asymmetric volatility, higher volatility is generally associated with the contractionary phase of the Australian business cycle. This finding has important implications for macroeconomic policy and forecasting for business cycle.

Keywords: Business Cycle; Real GDP; Information Matrix Test; Lagrange Multiplier Test; Multivariate Asymmetric GARCH; Asymmetric Conditional Volatility (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Date: 2007
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