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The Asian financial crisis : the start of a regime switch in volatility

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  • GIOT, Pierre

Abstract

Using a Markov switching model applied to the VIX and VDAX implied volatility indexes, we find that the volatility of the U.S. S&P100 index and German DAX index switched from a low-value state to a high-value state around the events of the Asian financial crisis. Moreover, the U.S. and German markets have stayed in the highvolatility state for the next five years. We also show that there has been a structural change in the stock index volatility vs returns relationship.

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File URL: http://alfresco.uclouvain.be/alfresco/download/attach/workspace/SpacesStore/2535d55a-4ae4-458b-8ca0-ec3013d2d200/coredp_2003_78.pdf
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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003078.

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Date of creation: 00 Nov 2003
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Handle: RePEc:cor:louvco:2003078

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Related research

Keywords: implied volatility; financial crisis; Markov switching model; stock market;

References

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  1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  2. Brooks, Chris & Persand, Gita, 2001. "The trading profitability of forecasts of the gilt-equity yield ratio," International Journal of Forecasting, Elsevier, vol. 17(1), pages 11-29.
  3. Bank for International Settlements, 2001. "Market liquidity: proceedings of a workshop held at the BIS," BIS Papers, Bank for International Settlements, number 02, 3.
  4. Holger Claessen & Stefan Mittnik, 2002. "Forecasting stock market volatility and the informational efficiency of the DAX-index options market," The European Journal of Finance, Taylor & Francis Journals, vol. 8(3), pages 302-321.
  5. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
  6. Graciela L. Kaminsky & Sergio L. Schmukler, 1999. "What triggers market jitters: a chronicle of the Asian crisis," International Finance Discussion Papers 634, Board of Governors of the Federal Reserve System (U.S.).
  7. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
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Cited by:
  1. Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2006. "Exchange rate volatility and the mixture of distribution hypothesis," Empirical Economics, Springer, vol. 30(4), pages 889-911, January.
  2. Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 395-422.

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