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Modelling stock volatilities during financial crises: A time varying coefficient approach

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  • Karanasos, Menelaos
  • Paraskevopoulos, Alexandros G.
  • Menla Ali, Faek
  • Karoglou, Michail
  • Yfanti, Stavroula

Abstract

We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the volatility dynamics, including the underlying volatility persistence and volatility spillover structure. Using daily data from several key stock market indices, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying model which provides the platform upon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for time varying asymmetric GARCH specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure.

Suggested Citation

  • Karanasos, Menelaos & Paraskevopoulos, Alexandros G. & Menla Ali, Faek & Karoglou, Michail & Yfanti, Stavroula, 2014. "Modelling stock volatilities during financial crises: A time varying coefficient approach," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 113-128.
  • Handle: RePEc:eee:empfin:v:29:y:2014:i:c:p:113-128
    DOI: 10.1016/j.jempfin.2014.08.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Leoni Eleni Oikonomikou, 2016. "Modeling Financial Market Volatility in Transition Markets: A Multivariate Case," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 204, Courant Research Centre PEG.
    2. repec:eee:riibaf:v:45:y:2018:i:c:p:307-322 is not listed on IDEAS
    3. Eraslan, Sercan & Ali, Faek Menla, 2017. "Financial crises and the dynamic linkages between stock and bond returns," Discussion Papers 17/2017, Deutsche Bundesbank.
    4. repec:eee:finana:v:53:y:2017:i:c:p:94-111 is not listed on IDEAS
    5. repec:eee:finana:v:57:y:2018:i:c:p:246-256 is not listed on IDEAS
    6. repec:eee:riibaf:v:46:y:2018:i:c:p:490-501 is not listed on IDEAS
    7. Yarovaya, Larisa & Brzeszczyński, Janusz & Lau, Chi Keung Marco, 2016. "Intra- and inter-regional return and volatility spillovers across emerging and developed markets: Evidence from stock indices and stock index futures," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 96-114.
    8. BenSaïda, Ahmed, 2015. "The frequency of regime switching in financial market volatility," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 63-79.

    More about this item

    Keywords

    Financial crisis; Time varying GARCH models; Structural breaks; Volatility spillovers;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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