Volatility analysis during the Asia crisis: a multivariate GARCH‐M model for stock returns in the U.S., Germany and Japan

Wolfgang Polasek and Lei Ren

Applied Stochastic Models in Business and Industry, 2001, vol. 17, issue 1, 93-108

Abstract: The Asia crisis in the summer of 1997 triggered a negative shock to the world economy. But when did it hit the major stock markets? In this paper we analyse the daily stock returns in the U.S., Germany and Japan for a period of 2 years (June 21st, 1996 to June 22nd, 1998). We estimate a VAR‐GARCH in mean model to investigate the multivariate volatility effects between the time series. We are also interested in the question of whether or not the volatility of the 3 stock returns will feed back on the returns themselves. Using the marginal likelihood criterion for model selection of the stock returns we find a VAR(1)‐GARCH(2,2)‐M (1) model. The model is estimated using MCMC methods and the coefficients show quite a rich transmission pattern between the stock markets. Comparing the models before and after the Asia crisis we see that the dynamic structure of the VAR model has changed. Copyright © 2001 John Wiley & Sons, Ltd.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:17:y:2001:i:1:p:93-108

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