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Modeling dependence structure in size-sorted portfolios: A Structural Multivariate GARCH Model

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  • George Milunovich

Abstract

A new model is developed that augments a structural VAR specification with a GARCH covariance matrix. The model is utilised to study time series dependencies between three size-sorted portfolios from the Australian Stock Exchange. Even after accounting for contemporaneous correlations the returns on small and medium firm portfolios are found to lag the large firm portfolio returns. An asymmetric lag structure is also found in the structural variance equations. The evidence is consistent with the Lo and MacKinlay (1990) lead-lag effect and the volatility spill-over hypothesis of Condrad, Gultekin and Kaul (1991).

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 55.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:55

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Keywords: Heteroschedasticity; Simultaneous Equations; Multivariate GARCH; Size-Sorted Portfolios; Conditional Impulse Responses; Conditional Variance Decomposition;

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  1. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
  2. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-44.
  3. Mech, Timothy S., 1993. "Portfolio return autocorrelation," Journal of Financial Economics, Elsevier, Elsevier, vol. 34(3), pages 307-344, December.
  4. Adrian Pagan, 1985. "Two Stage and Related Estimators and Their Applications," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 741, Cowles Foundation for Research in Economics, Yale University.
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  6. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 122-150, February.
  7. Conrad, Jennifer & Kaul, Gautam, 1989. "Mean Reversion in Short-Horizon Expected Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(2), pages 225-40.
  8. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1575-617, December.
  9. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
  10. Fargher, Neil L & Weigand, Robert A, 1998. "Changes in the Stock Price Reaction of Small Firms to Common Information," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(1), pages 105-21, Spring.
  11. Andrew W. Lo & Craig A. MacKinlay, . "An Econometric Analysis of Nonsyschronous-Trading," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 19-89, Wharton School Rodney L. White Center for Financial Research.
  12. Jegadeesh N. & Titman S., 1995. "Short-Horizon Return Reversals and the Bid-Ask Spread," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 4(2), pages 116-132, April.
  13. Cha, Baekin & Oh, Sekyung, 2000. "The relationship between developed equity markets and the Pacific Basin's emerging equity markets," International Review of Economics & Finance, Elsevier, Elsevier, vol. 9(4), pages 299-322, October.
  14. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 3(1), pages 15-102, May.
  15. Chang, Eric C. & McQueen, Grant R. & Pinegar, J. Michael, 1999. "Cross-autocorrelation in Asian stock markets," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 7(5), pages 471-493, December.
  16. Conrad, Jennifer & Gultekin, Mustafa N & Kaul, Gautam, 1991. "Asymmetric Predictability of Conditional Variances," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(4), pages 597-622.
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Cited by:
  1. Vargas, Gregorio A., 2006. "An Asymmetric Block Dynamic Conditional Correlation Multivariate GARCH Model," MPRA Paper 189, University Library of Munich, Germany, revised Aug 2006.

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