Volatility spillovers, interdependence and comovements: A Markov Switching approach

Authors:
Giampiero M. Gallo;Edoardo Otranto
Affiliations:
Dipartimento di Statistica "G. Parenti", Universití di Firenze, Viale G.B. Morgagni 59, 50134 Firenze, Italy;Dipartimento di Economia, Impresa e Regolamentazione, Universití di Sassari, Via Torre Tonda 34, 07100 Sassari, Italy
Venue:
Computational Statistics & Data Analysis
Year:
2008

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Abstract

The transmission mechanisms of volatility between markets can be characterized within a new Markov Switching bivariate model where the state of one variable feeds into the transition probability of the state of the other. A number of model restrictions and hypotheses can be tested to stress the role of one market relative to another (spillover, interdependence, comovement, independence, Granger noncausality). The model is estimated on the weekly high-low range of five Asian markets, assuming a central (but not necessarily dominant) role for Hong Kong. The results show plausible market characterizations over the long run with a spillover from Hong Kong to Korea and Thailand, interdependence with Malaysia and comovement with Singapore.