Modelling Returns and Volatilities During Financial Crises: A Time Varying Coefficient Approach

36 Pages Posted: 29 Mar 2014

See all articles by Menelaos Karanasos

Menelaos Karanasos

Brunel University London - Economics and Finance

Alexandros Paraskevopoulos

The Center for Research and Applications of Nonlinear Systems (CRANS) Department of Mathematics, Division of Applied Analysis, University of Patras

Faek Menla Ali

University of Sussex -University of Sussex Business School

Michail Karoglou

Aston University

stavroula Yfanti

Brunel University London

Date Written: March 27, 2014

Abstract

We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the mean and volatility dynamics, including the underlying volatility persistence and volatility spillovers structure. Using daily data from several key stock market indices we find that stock market returns exhibit time varying persistence in their corresponding conditional variances. Furthermore, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying model which provides the platform upon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for low order time varying specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure.

Keywords: financial crisis, stochastic difference equations, structural breaks, time varying coefficients, volatility spillovers

JEL Classification: C53; C58; G15

Suggested Citation

Karanasos, Menelaos and Paraskevopoulos, Alexandros and Menla Ali, Faek and Karoglou, Michail and Yfanti, stavroula, Modelling Returns and Volatilities During Financial Crises: A Time Varying Coefficient Approach (March 27, 2014). Available at SSRN: https://ssrn.com/abstract=2416999 or http://dx.doi.org/10.2139/ssrn.2416999

Menelaos Karanasos (Contact Author)

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

Alexandros Paraskevopoulos

The Center for Research and Applications of Nonlinear Systems (CRANS) Department of Mathematics, Division of Applied Analysis, University of Patras ( email )

Patra
Greece

Faek Menla Ali

University of Sussex -University of Sussex Business School ( email )

Falmer
Brighton, East Sussex BN1 9SL
United Kingdom

Michail Karoglou

Aston University ( email )

Aston Triangle
Birmingham, B4 7ET
United Kingdom

Stavroula Yfanti

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

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