Volatility Transmission in Financial Markets: A New Approach
Giampiero Gallo () and
Edoardo Otranto ()
Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"
In this paper we suggest ways to characterize the transmission mechanisms of volatility between markets by making use of a new Markov Switching bivariate model where the state of one variable feeds into the transition probability of the state of the other. The comparison between this model and other Markov Switching models allows us to derive statistical tests stressing the role of one market relative to another (contagion, interdependence, comovement, independence, Granger causality). We estimate the model on the weekly high–low range of several Asian markets, with a specific interest in the role of Hong Kong.
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