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Modelling Australian Stock Market Volatility: A Multivariate GARCH Approach

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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File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow065433.pdf
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Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp09-11.

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Length: 15 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:uow:depec1:wp09-11
Contact details of provider: Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
Phone: +612 4221-3659
Fax: +612 4221-3725
Web page: http://business.uow.edu.au/econ/index.html
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  1. Pagan, Adrian R. & Schwert, G. William, 1990. "Alternative models for conditional stock volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 267-290.
  2. Mario Reyes, 2001. "Asymmetric volatility spillover in the Tokyo stock exchange," Journal of Economics and Finance, Springer, vol. 25(2), pages 206-213, June.
  3. Brooks, C. & Henry, O.T., 1999. "Linear and Non-Linear Transmission of Equity Return Volatility: Evidence From the US, Japan, and Australia," Department of Economics - Working Papers Series 676, The University of Melbourne.
  4. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  5. Angelos Kanas, 1998. "Volatility spillovers across equity markets: European evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 245-256.
  6. Timothy J. Brailsford, 1996. "Volatility Spillovers Across the Tasman," Australian Journal of Management, Australian School of Business, vol. 21(1), pages 13-27, June.
  7. Higgins, Matthew L & Bera, Anil K, 1992. "A Class of Nonlinear ARCH Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 137-58, February.
  8. Theodossiou, Panayiotis, et al, 1997. "Volatility Reversion and Correlation Structure of Returns in Major International Stock Markets," The Financial Review, Eastern Finance Association, vol. 32(2), pages 205-24, May.
  9. In, Francis, 2007. "Volatility spillovers across international swap markets: The US, Japan, and the UK," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 329-341, April.
  10. Guglielmo Caporale & Nikitas Pittis & Nicola Spagnolo, 2006. "Volatility transmission and financial crises," Journal of Economics and Finance, Springer, vol. 30(3), pages 376-390, September.
  11. Scherrer, Wolfgang & Ribarits, Eva, 2007. "On The Parametrization Of Multivariate Garch Models," Econometric Theory, Cambridge University Press, vol. 23(03), pages 464-484, June.
  12. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
  13. Abbas Valadkhani & Surachai Chancharat & Charles Harvie, 2008. "A factor analysis of international portfolio diversification," Studies in Economics and Finance, Emerald Group Publishing, vol. 25(3), pages 165-174, June.
  14. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  15. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, . "Multivariate GARCH models: a survey," CORE Discussion Papers RP -1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Ng, Angela, 2000. "Volatility spillover effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 207-233, April.
  17. repec:ner:tilbur:urn:nbn:nl:ui:12-194709 is not listed on IDEAS
  18. Hong Li, 2007. "International linkages of the Chinese stock exchanges: a multivariate GARCH analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 17(4), pages 285-297.
  19. Kam C. Chan & Benton E. Gup & Ming-Shiun Pan, 1997. "International Stock Market Efficiency and Integration: A Study of Eighteen Nations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 803-813.
  20. Hassan, Syed Aun & Malik, Farooq, 2007. "Multivariate GARCH modeling of sector volatility transmission," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 470-480, July.
  21. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  22. Andrew Worthington & Helen Higgs, 2004. "Transmission of equity returns and volatility in Asian developed and emerging markets: a multivariate GARCH analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 71-80.
  23. de Goeij, P. C. & Marquering, W., 2004. "Modeling the conditional covariance between stock and bond returns : A multivariate GARCH approach," Other publications TiSEM 94fe5ada-715a-4339-b94c-f, School of Economics and Management.
  24. Amado Peiro & Javier Quesada & Ezequiel Uriel, 1998. "Transmission of movements in stock markets," The European Journal of Finance, Taylor & Francis Journals, vol. 4(4), pages 331-343.
  25. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 241-256, June.
  26. Paul D. McNelis, 1993. "The Response of Australian Stock, Foreign Exchange and Bond Markets to Foreign Asset Returns and Volatilities," RBA Research Discussion Papers rdp9301, Reserve Bank of Australia.
  27. Theodossiou, Panayiotis & Lee, Unro, 1993. "Mean and Volatility Spillovers across Major National Stock Markets: Further Empirical Evidence," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 337-50, Winter.
  28. Peter de Goeij, 2004. "Modeling the Conditional Covariance Between Stock and Bond Returns: A Multivariate GARCH Approach," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 531-564.
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