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A MEM-based Analysis of Volatility Spillovers in East Asian Financial Markets

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Abstract

Transmission mechanisms in financial markets reflect the degree of integration of capital markets, as well as the relative importance of real economies. Market volatility has components which may behave differently across quiet and turbulent periods, but appear to behave in similar ways from market to market. In this paper we suggest a Multiplicative Error Model (MEM) approach to study volatility spillovers among a set of markets, using as a proxy, the market daily range. We model the dynamics of the expected volatility of one market including interactions with the past daily ranges of other markets, building a fully interdependent model. We analyze eight East Asian markets in the period 1995-2006, devoting particular attention to the treatment of the 1997-1998 turbulence period. We find no evidence of independent markets while several interdependence relationships can be stressed. Hong Kong turns out to be the most important market while Taiwan seems to have suffered quite limited effects from the crisis. Impulse response functions and multiperiod forecast profiles are developed and suggest a build-up in the spillover effects.

Suggested Citation

  • Robert F. Engle & Giampiero M. Gallo & Margherita Velucchi, 2008. "A MEM-based Analysis of Volatility Spillovers in East Asian Financial Markets," Econometrics Working Papers Archive wp2008_09, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    • Handle: RePEc:fir:econom:wp2008_09
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    Cited by:

    1. Balli, Faruk & Balli, Hatice O. & Jean Louis, Rosmy & Vo, Tuan Kiet, 2015. "The transmission of market shocks and bilateral linkages: Evidence from emerging economies," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 349-357.
    2. Bubák, Vít & Kocenda, Evzen & Zikes, Filip, 2011. "Volatility transmission in emerging European foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2829-2841, November.
    3. Beirne, John & Caporale, Guglielmo Maria & Schulze-Ghattas, Marianne & Spagnolo, Nicola, 2010. "Global and regional spillovers in emerging stock markets: A multivariate GARCH-in-mean analysis," Emerging Markets Review, Elsevier, vol. 11(3), pages 250-260, September.
    4. Serda Selin Öztürk & Engin Volkan, 2015. "Intraindustry Volatility Spillovers in the MENA Region," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(6), pages 1163-1174, November.
    5. Mr. Phurichai Rungcharoenkitkul, 2011. "Risk Sharing and Financial Contagion in Asia: An Asset Price Perspective," IMF Working Papers 2011/242, International Monetary Fund.
    6. Andreou, Elena & Matsi, Maria & Savvides, Andreas, 2013. "Stock and foreign exchange market linkages in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 248-268.

    More about this item

    Keywords

    Multiplicative Error Model; volatility spillovers; impulse response functions; East Asian Markets;
    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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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