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Volatility Dependence and Contagion in Emerging Equity Markets

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Sebastian Edwards
Raul Susmel

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Abstract

In this paper we use weekly stock market data for a group of Latin American countries to analyze the behavior of volatility through time. We are particularly interested in understanding whether periods of high volatility are correlated across countries. The analysis uses both on univariate and bivariate switching volatility models. Our results do not rely on the correlation coefficients, but on the co-dependence of volatility regimes. The results indicate that high-volatility episodes are, in general, short-lived, lasting from two to twelve weeks. We find strong evidence of volatility co-movements across countries, especially among the Mercosur countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8506.

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Date of creation: Oct 2001
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Handle: RePEc:nbr:nberwo:8506

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F3 - International Economics - - International Finance
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December. [Downloadable!] (restricted)
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  2. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
  3. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 5-33. [Downloadable!] (restricted)
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  4. Hansen, B.E., 1991. "The Likelihood Test Under Non-Standard Conditions: Testing the Markov Trend Model of GNP," RCER Working Papers 279, University of Rochester - Center for Economic Research (RCER).
  5. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333. [Downloadable!] (restricted)
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  7. Goodwin, Thomas H, 1993. "Business-Cycle Analysis with a Markov-Switching Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 331-39, July.
  8. Clifford Ball & Walter Torous, 1995. "Regime Shifts in Short Term Riskless Interest Rates," University of California at Los Angeles, Anderson Graduate School of Management 1141, Anderson Graduate School of Management, UCLA. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
  10. Bruce E. Hansen, 1995. "Erratum: The Likelihood ratio Test Under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Boston College Working Papers in Economics 296., Boston College Department of Economics. [Downloadable!]
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  11. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(2), pages 281-307. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Reinhart, Carmen & Kaminsky, Graciela, 2002. "Financial markets in time of stress," MPRA Paper 13869, University Library of Munich, Germany. [Downloadable!]
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  2. Roberta Colavecchio & Michael Funke, 2009. "Volatility Dependence across Asia-Pacific Onshore and Offshore Currency Forwards Markets," Working Papers 112009, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  3. Ryan SULEIMANN, 2003. "The Contagion Effect Between the Volatilities of the NASDAQ-100 and the IT.CA :A Univariate and A Bivariate Switching Approach," Econometrics 0307002, EconWPA, revised 18 Jul 2003. [Downloadable!]
  4. Colavecchio , Roberta & Funke, Michael, 2007. "Volatility dependence across Asia-Pacific on-shore and off-shore U.S. dollar futures markets," BOFIT Discussion Papers 17/2007, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  5. Serwa, Dobromił, 2007. "Banking crises and nonlinear linkages between credit and output," MPRA Paper 5946, University Library of Munich, Germany. [Downloadable!]
  6. Kamil Yilmaz, 2009. "Return and Volatility Spillovers among the East Asian Equity Markets," TÜSİAD-Koç University Economic Research Forum Working Papers 0907, TUSIAD-Koc University Economic Research Forum. [Downloadable!]
  7. Kole, H.J.W.G. & Koedijk, C.G. & Verbeek, M.J.C.M., 2003. "Stress Testing with Student's t Dependence," Research Paper ERS-2003-056-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  8. Ryan SULEIMANN, 2003. "Should Stock Market Indexes Time Varying Correlations Be Taken Into Account? A Conditional Variance Multivariate Approach," Econometrics 0307004, EconWPA, revised 18 Jul 2003. [Downloadable!]
  9. Michel Beine & Pierre-Yves Preumont & Ariane Szafarz, 2006. "Sector diversification during crises: A European perspective," Working Papers DULBEA 06-07.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
    Other versions:
  10. Ryan SULEIMANN, 2003. "New Technology Stock Market Indexes Contagion: A VAR-dccMVGARCH Approach," Econometrics 0307003, EconWPA, revised 18 Jul 2003. [Downloadable!]
  11. Giampiero Gallo & Edoardo Otranto, 2007. "Volatility Spillovers, Interdependence and Comovements: A Markov Switching Approach," Econometrics Working Papers Archive wp2007_11, Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti". [Downloadable!]
    Other versions:
  12. Denis Pelletier, 2004. "Regime Switching for Dynamic Correlations," Econometric Society 2004 North American Summer Meetings 230, Econometric Society. [Downloadable!]
    Other versions:
  13. Maria Kasch & Massimiliano Caporin, 2008. "Volatility Threshold Dynamic Conditional Correlations: An International Analysis," "Marco Fanno" Working Papers 0065, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  14. Hyde, Stuart J & Bredin, Don P & Nguyen, Nghia, 2007. "Correlation dynamics between Asia-Pacific, EU and US stock returns," MPRA Paper 9681, University Library of Munich, Germany. [Downloadable!]
  15. Laurence Fung & Ip-wing Yu, 2009. "A Study on the Transmission of Money Market Tensions in EMEAP Economies During the Credit Crisis of 2007 - 2008," Working Papers 0909, Hong Kong Monetary Authority. [Downloadable!]
  16. Giampiero M. Gallo & Margherita Velucchi, 2009. "Market interdependence and financial volatility transmission in East Asia," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 24-44. [Downloadable!]
  17. Hsing, Y., 2004. "Responses of Argentine Output to Shocks to Monetary Policy, Fiscal Policy and Exchange Rates: A VAR Model," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(1). [Downloadable!]
  18. Giampiero Gallo & Edoardo Otranto, 2006. "Volatility Transmission Across Markets: A Multi-Chain Markov Switching Model," Econometrics Working Papers Archive wp2006_04, Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti". [Downloadable!]
    Other versions:
  19. Jon Wongswan, 2003. "Contagion: an empirical test," International Finance Discussion Papers 775, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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