Measuring Persistence in Volatility Spillovers

University of Heidelberg, Department of Economics, Discussion Paper No. 543

28 Pages Posted: 16 Apr 2013

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Enzo Weber

University of Regensburg; Government of the Federal Republic of Germany - Institute for Employment Research (IAB); Osteuropa-Institut (OEI)

Date Written: April 15, 2013

Abstract

This paper analyzes volatility spillovers in multivariate GARCH-type models. We show that the cross-effects between the conditional variances determine the persistence of the transmitted volatility innovations. In particular, the effect of a foreign volatility innovation on a conditional variance is even more persistent than the effect of an own innovation unless it is offset by an accompanying negative variance spillover of sufficient size. Moreover, ignoring a negative variance spillover causes a downward bias in the estimate of the initial impact of the foreign volatility innovation. Applying the concept to portfolios of small and large firms, we find that shocks to small firm returns affect the large firm conditional variance once we allow for (negative) spillovers between the conditional variances themselves.

Keywords: Multivariate GARCH, spillover, persistence, small and large firms

JEL Classification: C32, C51, C52, C53, G10

Suggested Citation

Conrad, Christian and Weber, Enzo, Measuring Persistence in Volatility Spillovers (April 15, 2013). University of Heidelberg, Department of Economics, Discussion Paper No. 543, Available at SSRN: https://ssrn.com/abstract=2251141 or http://dx.doi.org/10.2139/ssrn.2251141

Christian Conrad (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

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Heidelberg, D-69117
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Enzo Weber

University of Regensburg ( email )

93040 Regensburg
D-93040 Regensburg, 93053
Germany

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

Osteuropa-Institut (OEI) ( email )

Landshuter Str. 4
Regensburg, 93047
Germany

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