Testing for volatility co-movement in bivariate stochastic volatility models

Jinghui Chen, Masahito Kobayashi and Michael McAleer
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Jinghui Chen: Graduate School of International Social Sciences Yokohama National University.

No 2017-10, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: The paper considers the problem of volatility co-movement, namely as to whether two financial returns have perfectly correlated common volatility process, in the framework of multivariate stochastic volatility models and proposes a test which checks the volatility co-movement. The proposed test is a stochastic volatility version of the co-movement test proposed by Engle and Susmel (1993), who investigated whether international equity markets have volatility co-movement using the framework of the ARCH model. In empirical analysis we found that volatility co-movement exists among closelylinked stock markets and that volatility co-movement of the exchange rate markets tends to be found when the overall volatility level is low, which is contrasting to the often-cited finding in the financial contagion literature that financial returns have co-movement in the level during the financial crisis.

Keywords: Lagrange multiplier test; Volatility co-movement; Stock markets; Exchange rate Markets; Financial crisis. (search for similar items in EconPapers)
JEL-codes: C12 C58 G01 G11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017-02
New Economics Papers: this item is included in nep-ets and nep-ore
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https://eprints.ucm.es/id/eprint/41441/1/1710.pdf (application/pdf)

Related works:
Working Paper: Testing for Volatility Co-movement in Bivariate Stochastic Volatility Models (2017)
Working Paper: Testing for Volatility Co-movement in Bivariate Stochastic Volatility Models (2017)
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