A MEM-Based Analysis of Volatility Spillovers in East Asian Financial Markets

21 Pages Posted: 14 Oct 2008 Last revised: 10 Dec 2013

See all articles by Robert F. Engle

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Giampiero M. Gallo

Corte dei Conti - Italian Court of Audits; University of Bologna - Rimini Center for Economic Analysis (RCEA); Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti"

Margherita Velucchi

University of Florence - Dipartimento di Statistica, Informatica, Applicazioni (DiSIA)

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Date Written: June 20, 2008

Abstract

Transmission mechanisms in financial markets reflect the degree of integration of capital markets and of real economies. As a matter of fact, volatility has components which may behave differently across quiet and turbulent periods, but appear to behave in similar ways from market to market. In this paper we suggest a Multiplicative Error Model (MEM) approach which is suitable for modeling directly the conditional expectation of the market daily range which is a good proxy for volatility. In the present context, the dynamics of the expected volatility of one market is extended to include interactions with the past daily ranges of other markets, thus building a potentially fully interdependent model. We analyze eight East Asian markets in the period 1995-2006, devoting particular attention to the treatment of the 1997-1998 turbulence period. We show that for some of the markets there is no evidence of changes in the dynamic impacts within the crisis and without and for other markets such a change is limited to a level shift: this suggests that the links may have been stable across sub-periods.

Keywords: Volatility, Multiplicative Error Models, Asian Crisis, Market integration

JEL Classification: C32, G15, N25

Suggested Citation

Engle, Robert F. and Gallo, Giampiero M. and Velucchi, Margherita, A MEM-Based Analysis of Volatility Spillovers in East Asian Financial Markets (June 20, 2008). Available at SSRN: https://ssrn.com/abstract=1283254 or http://dx.doi.org/10.2139/ssrn.1283254

Robert F. Engle

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Giampiero M. Gallo (Contact Author)

Corte dei Conti - Italian Court of Audits ( email )

viale Mazzini
Roma, Roma 00195
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti" ( email )

Viale G.B. Morgagni, 59
Florence, 50134
Italy
0039 055 2751 591 (Phone)
0039 055 4223560 (Fax)

HOME PAGE: http://www.disia.unifi.it/gallog

Margherita Velucchi

University of Florence - Dipartimento di Statistica, Informatica, Applicazioni (DiSIA) ( email )

Viale Morgagni, 59
Florence, 50134
Italy

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