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Modelling Australian Stock Market Volatility: A Multivariate GARCH Approach

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Abstract

This paper uses a multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model to provide an insight into the nature of interaction between stock market returns of four countries, namely, Australia, Singapore, the UK, and the US. Using weekly data spanning from January 1992 to December 2008 the results indicate that all markets (particularly Australia and Singapore) display significant positive mean-spillovers from the US stock market returns but not vice versa. We also found strong evidence for both own and cross ARCH and GARCH effects among all four markets, indicating the existence of significant volatility and cross volatility spillovers across all four markets. Given a high degree of common time-varying co-volatility among these four countries, investors will be highly unlikely to benefit a reduction of risk if they diversify their financial portfolio with stocks from these four countries only

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  • Valadkhani, Abbas & O'Brien, Martin & Karunanayake, Indika, 2009. "Modelling Australian Stock Market Volatility: A Multivariate GARCH Approach," Economics Working Papers wp09-11, School of Economics, University of Wollongong, NSW, Australia.
    • Handle: RePEc:uow:depec1:wp09-11
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    More about this item

    Keywords

    Multivariate GARCH; Stock returns; Volatility; Australia;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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