Testing for Volatility Co-movement in Bivariate Stochastic Volatility Models
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 closelylinked 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.
|Keywords||Lagrange multiplier test, Volatility co-movement, Stock markets, Exchange rate Markets, Financial crisis|
|JEL||Hypothesis Testing (jel C12), Financial Econometrics (jel C58), Financial Crises (jel G01), Portfolio Choice; Investment Decisions (jel G11)|
|Series||Discussion paper / Tinbergen Institute , Econometric Institute Research Papers|
Chen, J, Kobayashi, M, & McAleer, M.J. (2017). Testing for Volatility Co-movement in Bivariate Stochastic Volatility Models (No. EI2017-08). Econometric Institute Research Papers. Retrieved from http://hdl.handle.net/1765/99788