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Volatility contagion: A range-based volatility approach

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  • Chiang, Min-Hsien
  • Wang, Li-Min

Abstract

This article proposes a new approach to evaluate volatility contagion in financial markets. A time-varying logarithmic conditional autoregressive range model with the lognormal distribution (TVLCARR) is proposed to capture the possible smooth transition in the range process. Additionally, a smooth transition copula function is employed to detect the volatility contagion between financial markets. The approach proposed is applied to the stock markets of the G7 countries to investigate the volatility contagion due to the subprime mortgage crisis. Empirical evidence shows that volatility is contagious from the US market to several markets examined.

Suggested Citation

  • Chiang, Min-Hsien & Wang, Li-Min, 2011. "Volatility contagion: A range-based volatility approach," Journal of Econometrics, Elsevier, vol. 165(2), pages 175-189.
    • Handle: RePEc:eee:econom:v:165:y:2011:i:2:p:175-189
    DOI: 10.1016/j.jeconom.2011.07.004
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    More about this item

    Keywords

    LCARR; Price range; Smooth transition copula; Subprime mortgage crisis; TVLCARR; Volatility contagion;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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

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