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Better to give than to receive: Predictive directional measurement of volatility spillovers

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  • Diebold, Francis X.
  • Yilmaz, Kamil

Abstract

Using a generalized vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering, we propose measures of both the total and directional volatility spillovers. We use our methods to characterize daily volatility spillovers across US stock, bond, foreign exchange and commodities markets, from January 1999 to January 2010. We show that despite significant volatility fluctuations in all four markets during the sample, cross-market volatility spillovers were quite limited until the global financial crisis, which began in 2007. As the crisis intensified, so too did the volatility spillovers, with particularly important spillovers from the stock market to other markets taking place after the collapse of the Lehman Brothers in September 2008.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 28 (2012)
Issue (Month): 1 ()
Pages: 57-66

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Handle: RePEc:eee:intfor:v:28:y:2012:i:1:p:57-66

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Web page: http://www.elsevier.com/locate/ijforecast

Related research

Keywords: Asset market; Asset return; Stock market; Market linkage; Financial crisis; Contagion; Vector autoregression; Variance decomposition;

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References

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  1. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2005. "Practical Volatility and Correlation Modeling for Financial Market Risk Management," NBER Working Papers 11069, National Bureau of Economic Research, Inc.
  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  3. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range-Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, 06.
  4. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
  5. Francis X. Diebold & Kamil Yilmaz, 2007. "Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets," PIER Working Paper Archive 07-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Mervyn King & Enrique Sentana & Sushil Wadhwani, 1990. "Volatiltiy and Links Between National Stock Markets," NBER Working Papers 3357, National Bureau of Economic Research, Inc.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
  8. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  9. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
  10. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  11. Engle, Robert F & Ito, Takatoshi & Lin, Wen-Ling, 1990. "Meteor Showers or Heat Waves? Heteroskedastic Intra-daily Volatility in the Foreign Exchange Market," Econometrica, Econometric Society, vol. 58(3), pages 525-42, May.
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