South Bank University, London

Volatility Transmission and Financial Crises

Email address: g.m.caporale@sbu.ac.uk

Keywords: Paper 1Causality-in-variance, Multivariate GARCH, BEKK representation, Stock prices, Volatility, Financial crises.

JEL Classifications: C32, G15

Abstract:
In this paper we examine the international transmission of financial crises. In particular, the consequences of the 1997 South East Asia crisis for other major stock markets are analysed. We use a bivariate GARCH model, for which a BEKK representation is adopted, and construct LR tests for causality-in-variance. Appropriate empirical critical values are computed by means of Monte Carlo experiments. Three pairwise models are estimated using data on the US, European, Japanese and South East Asian daily stock market returns. We find evidence of volatility spillovers in all three models. Although the dynamics of the conditional volatilities differ, overall the results suggest that causality links in the variance are strong and bidirectional in normal periods, but following the onset of the crisis become unidirectional, running from the markets in turmoil to the others.

PDF file of paper: caporale.pdf

Session: Currency Crisis

Time: Sunday, 8 July, 2:15pm - 3:45pm

Room: E