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Analysis of Volatility Spillover Effects: Two-Stage Procedure Based on a Modified Garch-M

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  • Parinaz Ezzati

    (University of Western Australia)

Abstract

With the beginning of global financial integration in the mid-1980s, co-movements of volatilities were also observed. These co-movements suggest that financial markets’ volatilities spillover from one market to another. This study has been undertaken to establish the soundness of this proposition, focusing on Iran, through an analysis of the international transmission of financial volatility movements among six selected countries, considering unidirectional effects coming from the U.S., Germany, Japan, Saudi Arabia and Kuwait to Iran. The selection of these countries was based on the recycling of petrodollars. The analysis has been conducted using two stage procedure based on GARCH-M model; whilst data took the form of monthly financial returns derived from equity, money and foreign exchange markets of the selected countries. Results indicate existence of significant volatility interdependencies among Iranian financial markets within the Middle East and with the rest of the world. Interestingly, this paper also sheds light on the fact that while financial markets may not be integrated in levels, they can still be integrated in variances.

Suggested Citation

  • Parinaz Ezzati, 2013. "Analysis of Volatility Spillover Effects: Two-Stage Procedure Based on a Modified Garch-M," Economics Discussion / Working Papers 13-29, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:13-29
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    Cited by:

    1. Sikhosana, Ayanda & Aye, Goodness C., 2018. "Asymmetric volatility transmission between the real exchange rate and stock returns in South Africa," Economic Analysis and Policy, Elsevier, vol. 60(C), pages 1-8.
    2. Saswat Patra & Pradiptarathi Panda, 2021. "Spillovers and financial integration in emerging markets: Analysis of BRICS economies within a VAR‐BEKK framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 493-514, January.
    3. Do, A. & Powell, R. & Yong, J. & Singh, A., 2020. "Time-varying asymmetric volatility spillover between global markets and China’s A, B and H-shares using EGARCH and DCC-EGARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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