Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2016-03-08
Number: 16-015/III
Author-Name: Jinghui Chen
Author-Workplace-Name: Yokohama University, Japan
Author-Name: Masahito Kobayashi
Author-Workplace-Name: Yokohama University, Japan
Author-Name: Michael McAleer
Author-Workplace-Name: National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain
Title: Testing for a Common Volatility Process and Information Spillovers in Bivariate Financial Time Series Models
Abstract: The paper considers the problem as to whether financial returns have a common volatility process in the framework of stochastic volatility models that were suggested by Harvey et al. (1994). We propose a stochastic volatility version of the ARCH test proposed by Engle and Susmel (1993), who investigated whether international equity markets have a common volatility process. The paper also checks the hypothesis of frictionless cross-market hedging, which implies perfectly correlated volatility changes, as suggested by Fleming et al. (1998). The paper uses the technique of Chesher (1984) in differentiating an integral that contains a degenerate density function in deriving the Lagrange Multiplier test statistic.
Classification-JEL: C12, C58, G01, G11
Keywords: Volatility comovement, Cross-market hedging, Spillovers, Contagion
File-Url: https://papers.tinbergen.nl/16015.pdf
File-Format: application/pdf
File-Size: 472958 bytes
Handle: RePEc:tin:wpaper:20160015