JOURNAL OF THE JAPAN STATISTICAL SOCIETY
Online ISSN : 1348-6365
Print ISSN : 1882-2754
Articles
Testing for Volatility Co-Movement in Bivariate Stochastic Volatility Models
Jinghui ChenMasahito KobayashiMichael McAleer
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2017 Volume 47 Issue 1 Pages 13-36

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Abstract

The paper considers the problem of volatility co-movement, namely as to whether two financial returns have perfectly correlated common volatility process, in the framework of multivariate stochastic volatility models and proposes a test which checks the volatility co-movement. The proposed test is a stochastic volatility version of the co-movement test proposed by Engle and Susmel (1993), who investigated whether international equity markets have volatility co-movement using the framework of the ARCH model.

In empirical analysis we found that volatility co-movement exists among closely-linked stock markets and that volatility co-movement of the exchange rate markets tends to be found when the overall volatility level is low, which is contrasting to the often-cited finding in the financial contagion literature that financial returns have co-movement in the level during the financial crisis.

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© 2017 Japan Statistical Society
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