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The Adjustment of the Yule-Walker Relations in VAR Modeling: The Impact of the Euro on the Hong Kong Stock Market

Author

Listed:
  • Tim Brailsford

    (Australian National University, Australia)

  • Jack H.W. Penm

    (The Australian National University, Australia)

  • R. Deane Terrell

    (The Australian National University, Australia)

Abstract

Vector autoregressive models are increasingly being used in the analysis of relationships within and between financial markets. In such models, there are circumstances that require zero entries in the coefficient matrices. Such circumstances can be particularly relevant in the context of markets with special characteristics, such as emerging economies. This paper shows that a direct extension of the use of the Yule-Walker relations for fitting vector autoregressive models with zero-non-zero patterned coefficient matrices is inconsistent with statistical procedures as the resultant estimated variance-covariance matrix of the white noise disturbance process becomes non-symmetric. This inconsistency can cause a breakdown when testing financial theory. The paper provides a consistent adjustment which fits with the theory. The practical use of the adjustment is demonstrated in a vector system comprising variables from the Hong Kong stock market and foreign exchange markets.

Suggested Citation

  • Tim Brailsford & Jack H.W. Penm & R. Deane Terrell, 2001. "The Adjustment of the Yule-Walker Relations in VAR Modeling: The Impact of the Euro on the Hong Kong Stock Market," Multinational Finance Journal, Multinational Finance Journal, vol. 5(1), pages 35-58, March.
    • Handle: RePEc:mfj:journl:v:5:y:2001:i:1:p:35-58
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    foreign exchange market; time series; VAR models; Yule-Walker relations;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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