Volatility co-movements: a time scale decomposition analysis

Andrea Cipollini, Iolanda Lo Cascio () and Silvia Muzzioli ()

Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"

Abstract: In this paper we investigate short-run co-movements before and after the Lehman Brothers’ collapse among the volatility series of US and a number of European countries. The series under investigation (implied and realized volatility) exhibit long-memory and, in order to avoid miss-specification errors related to the parameterization of a long memory multivariate model, we rely on wavelet analysis. More specifically, we retrieve the time series of wavelet coefficients for each volatility series for high frequency scales, using the Maximal Overlapping Discrete Wavelet transform and we apply Maximum Likelihood for a factor decomposition of the short-run covariance matrix. The empirical evidence shows an increased interdependence in the post-break period and points at an increasing (decreasing) role of the common shock underlying the dynamics of the implied (realized) volatility series, once we move from the 2-4 days investment time horizon to the 8-16 days. Moreover, there is evidence of contagion from the US to Europe immediately after the Lehman Brothers’ collapse, only for realized volatilities over an investment time horizon between 8 and 16 days.

Keywords: Implied volatility; Realized Volatility; Co-movements; Long Memory; Wavelets (search for similar items in EconPapers)
JEL-codes: C32 C38 C58 G13 (search for similar items in EconPapers)
Pages: pages 30
Date: 2013-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Journal Article: Volatility co-movements: A time-scale decomposition analysis (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:mod:wcefin:0044

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