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A MEM-based Analysis of Volatility Spillovers in East Asian Financial Markets

Robert Engle, Giampiero Gallo () and Margherita Velucchi ()

Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"

Abstract: Transmission mechanisms in financial markets reflect the degree of integration of capital markets, as well as the relative importance of real economies. Market volatility has components which may behave differently across quiet and turbulent periods, but appear to behave in similar ways from market to market. In this paper we suggest a Multiplicative Error Model (MEM) approach to study volatility spillovers among a set of markets, using as a proxy, the market daily range. We model the dynamics of the expected volatility of one market including interactions with the past daily ranges of other markets, building a fully interdependent model. We analyze eight East Asian markets in the period 1995-2006, devoting particular attention to the treatment of the 1997-1998 turbulence period. We find no evidence of independent markets while several interdependence relationships can be stressed. Hong Kong turns out to be the most important market while Taiwan seems to have suffered quite limited effects from the crisis. Impulse response functions and multiperiod forecast profiles are developed and suggest a build-up in the spillover effects.

Keywords: Multiplicative Error Model; volatility spillovers; impulse response functions; East Asian Markets (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 F37 (search for similar items in EconPapers)
Date: 2008-06
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