Testing for a Common Volatility Process and Information Spillovers in Bivariate Financial Time Series Models

Jinghui Chen, Masahito Kobayashi and Michael McAleer
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Jinghui Chen: Yokohama University, Japan

No 16-015/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The paper considers the problem as to whether financial returns have a common volatility process in the framework of stochastic volatility models that were suggested by Harvey et al. (1994). We propose a stochastic volatility version of the ARCH test proposed by Engle and Susmel (1993), who investigated whether international equity markets have a common volatility process. The paper also checks the hypothesis of frictionless cross-market hedging, which implies perfectly correlated volatility changes, as suggested by Fleming et al. (1998). The paper uses the technique of Chesher (1984) in differentiating an integral that contains a degenerate density function in deriving the Lagrange Multiplier test statistic.

Keywords: Volatility comovement; Cross-market hedging; Spillovers; Contagion (search for similar items in EconPapers)
JEL-codes: C12 C58 G01 G11 (search for similar items in EconPapers)
Date: 2016-03-08
New Economics Papers: this item is included in nep-ore
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Related works:
Working Paper: Testing for a Common Volatility Process and Information Spillovers in Bivariate Financial Time Series Models (2016)
Working Paper: Testing for a Common Volatility Process and Information Spillovers in Bivariate Financial Time Series Models (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20160015

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