Volatility Transmission Across Markets: A Multi-Chain Markov Switching Model
The integration of financial markets across countries has modified the way prices react to news. Innovations originating in one market diffuse to other markets following patterns which usually stress the presence of interdependence. In some cases, though, covariances across markets have an asymmetric component which reflects the dominance of one over the others. The volatility transmission mechanisms in such events may be more complex than what can be modelled as a multivariate GARCH model. In this paper we adopt a new Markov Switching approach and we suppose that periods of high volatility and periods of low volatility represent the states of an ergodic Markov Chain where the transition probability is made dependent on the state of the “dominant” series. We provide some theoretical background and illustrate the model on Asian markets data showing support for the idea of dominant market and the good prediction performance of the model on a multi-period horizon.
|Date of creation:||Sep 2006|
|Publication status:||forthcoming Applied Financial Economics|
|Contact details of provider:|| Postal: Viale G.B. Morgagni, 59 - I-50134 Firenze - Italy|
Phone: +39 055 2751500
Fax: +39 055 2751525
Web page: http://www.disia.unifi.it/
More information through EDIRC
References listed on IDEAS
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.:
- Sebastian Edwards & Raul Susmel, 2001.
"Volatility Dependence and Contagion in Emerging Equity Markets,"
NBER Working Papers
8506, National Bureau of Economic Research, Inc.
- Edwards, Sebastian & Susmel, Raul, 2001. "Volatility dependence and contagion in emerging equity markets," Journal of Development Economics, Elsevier, vol. 66(2), pages 505-532, December.
- Rodolfo Aquino, 2005. "Exchange rate risk and Philippine stock returns: before and after the Asian financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 15(11), pages 765-771.
- Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
- Michael J. Dueker, 1995.
"Markov switching in GARCH processes and mean reverting stock market volatility,"
1994-015, Federal Reserve Bank of St. Louis.
- Dueker, Michael J, 1997. "Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 26-34, January.
- Kim, Chang-Jin, 1994.
"Dynamic linear models with Markov-switching,"
Journal of Econometrics,
Elsevier, vol. 60(1-2), pages 1-22.
- Kristin Forbes & Roberto Rigobon, 1999.
"No Contagion, Only Interdependence: Measuring Stock Market Co-movements,"
NBER Working Papers
7267, National Bureau of Economic Research, Inc.
- Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
- Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
- Tse, Y K & Tsui, Albert K C, 2002. "A Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model with Time-Varying Correlations," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 351-62, July.
- Sebastian Edwards & Raul Susmel, 2003. "Interest-Rate Volatility in Emerging Markets," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 328-348, May.
- Edoardo Otranto & Giampiero Gallo, 2002.
"A Nonparametric Bayesian Approach To Detect The Number Of Regimes In Markov Switching Models,"
Taylor & Francis Journals, vol. 21(4), pages 477-496.
- Edoardo Otranto & Giampiero M. Gallo, 2001. "A Nonparametric Bayesian Approach to Detect the Number of Regimes in Markov Switching Models," Econometrics Working Papers Archive wp2001_04, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
- Edoardo Otranto, 2005. "The multi-chain Markov switching model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(7), pages 523-537.
- Helen Higgs & Andrew Worthington, 2004. "Transmission of returns and volatility in art markets: a multivariate GARCH analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 217-222.
- Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
- Hahn Shik Lee, 2004. "International transmission of stock market movements: a wavelet analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 197-201.
- Celso Brunetti & Roberto S. Mariano & Chiara Scotti & Augustine H. H. Tan, 2007.
"Markov switching GARCH models of currency turmoil in southeast Asia,"
International Finance Discussion Papers
889, Board of Governors of the Federal Reserve System (U.S.).
- Brunetti, Celso & Scotti, Chiara & Mariano, Roberto S. & Tan, Augustine H.H., 2008. "Markov switching GARCH models of currency turmoil in Southeast Asia," Emerging Markets Review, Elsevier, vol. 9(2), pages 104-128, June.
- Osman Suliman, 2005. "Interest rate volatility, exchange rates, and external contagion," Applied Financial Economics, Taylor & Francis Journals, vol. 15(12), pages 883-894.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Angelos Kanas, 1998. "Volatility spillovers across equity markets: European evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 245-256.
- Celso Brunetti & Roberto S. Mariano & Chiara Scotti & Augustine H. H. Tan, 2003. "Markov Switching Garch Models of Currency Crises in Southeast Asia," PIER Working Paper Archive 03-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
When requesting a correction, please mention this item's handle: RePEc:fir:econom:wp2006_04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Francesco Calvori)
If references are entirely missing, you can add them using this form.