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Modeling Euro STOXX 50 volatility with common and market-specific components

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  • Cipollini, Fabrizio
  • Gallo, Giampiero M.

Abstract

Similar volatility patterns are observables in the Euro area across national indices, suggesting the possibility of an underlying common component as a consequence of financial and monetary integration. This peculiar interdependence across market volatilities is captured by an additive component vector Multiplicative Error Model (vMEM) where the volatility dynamics is split between a common and a vector of market-specific components. When extracted from five major market indices and used as additional regressors in a HAR specification for the Euro STOXX 50 (a Euro area wide index) volatility, these components replace the terms that mimic long memory in the HAR, providing an interesting interpretation for volatility dynamics.

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  • Cipollini, Fabrizio & Gallo, Giampiero M., 2019. "Modeling Euro STOXX 50 volatility with common and market-specific components," Econometrics and Statistics, Elsevier, vol. 11(C), pages 22-42.
    • Handle: RePEc:eee:ecosta:v:11:y:2019:i:c:p:22-42
    DOI: 10.1016/j.ecosta.2018.09.004
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    2. Voges, Michelle & Sibbertsen, Philipp, 2021. "Cyclical fractional cointegration," Econometrics and Statistics, Elsevier, vol. 19(C), pages 114-129.
    3. Fabrizio Cipollini & Giampiero M. Gallo, 2021. "Multiplicative Error Models: 20 years on," Papers 2107.05923, arXiv.org.
    4. Amendola, Alessandra & Candila, Vincenzo & Gallo, Giampiero M., 2019. "On the asymmetric impact of macro–variables on volatility," Economic Modelling, Elsevier, vol. 76(C), pages 135-152.

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