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Volatility Spillover and Multivariate Volatility Impulse Response Analysis of GFC News Events

Listed author(s):
  • David E. Allen

    (School of Mathematics and Statistics, University of Sydney, School of Business, University of South Australia.)

  • Michael McAleer

    ( Department of Quantitative Finance, National Tsing Hua University, Taiwan, Econometric Institute, Erasmus School of Economics, Erasmus University, Rotterdam, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, Spain, Institute of Advanced Sciences, Yokohama National University, Japan.)

  • Robert Powell

    (School of Business and Law, Edith Cowan University, Perth, Australia.)

  • Abhay K. Singh

    (School of Business and Law, Edith Cowan University, Perth, Australia.)

This paper applies two measures to assess spillovers across markets: the Diebold Yilmaz (2012) Spillover Index and the Hafner and Herwartz (2006) analysis of multivariate GARCH models using volatility impulse response analysis. We use two sets of data, daily realized volatility estimates taken from the Oxford Man RV library, running from the beginning of 2000 to October 2016, for the S&P500 and the FTSE, plus ten years of daily returns series for the New York Stock Exchange Index and the FTSE 100 index, from 3 January 2005 to 31 January 2015. Both data sets capture both the Global Financial Crisis (GFC) and the subsequent European Sovereign Debt Crisis (ESDC). The spillover index captures the transmission of volatility to and from markets, plus net spillovers. The key difference between the measures is that the spillover index captures an average of spillovers over a period, whilst volatility impulse responses (VIRF) have to be calibrated to conditional volatility estimated at a particular point in time. The VIRF provide information about the impact of independent shocks on volatility. In the latter analysis, we explore the impact of three different shocks, the onset of the GFC, which we date as 9 August 2007 (GFC1). It took a year for the financial crisis to come to a head, but it did so on 15 September 2008, (GFC2). The third shock is 9 May 2010. Our modelling includes leverage and asymmetric effects undertaken in the context of a multivariate GARCH model, which are then analysed using both BEKK and diagonal BEKK (DBEKK) models. A key result is that the impact of negative shocks is larger, in terms of the effects on variances and covariances, but shorter in duration, in this case a difference between three and six months.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2016-16.

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Length: 39 pages
Date of creation: Oct 2016
Handle: RePEc:ucm:doicae:1616
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