Higher-Order Terms in Bivariate Returns to International Stock Market Indices

Abstract

This article documents the stochastic properties of bivariate returns to international stock market indices. In particular, the article searches for the best fit among a class of higher-order VARMA(u,v)-EGARCH(p,q) models with normal errors and a constant conditional correlation using MSCI domestic and world-ex-domestic index pairs for the Emu, Japan, the United Kingdom, and the United States. Although a first-order VAR or VMA specification is sufficient to accommodate the conditional means, second-order EGARCH terms are necessary in two of the four bivariate series.

Keywords: higher-order; bivariate; international diversification; EGARCH; VARMA

JEL Classification: G15; G11; C15; C34