The Adjustment of the Yule-Walker Relations in VAR Modeling: The Impact of the Euro on the Hong Kong Stock Market

24 Pages Posted: 8 Jul 2015

See all articles by Tim Brailsford

Tim Brailsford

Bond University

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management

Date Written: July 7, 2015

Abstract

Vector autoregressive models are increasingly being used in the analysis of relationships within and between financial markets. In such models, there are circumstances that require zero entries in the coefficient matrices. Such circumstances can be particularly relevant in the context of markets with special characteristics, such as emerging economies. This paper shows that a direct extension of the use of the Yule-Walker relations for fitting vector autoregressive models with zero-non-zero patterned coefficient matrices is inconsistent with statistical procedures as the resultant estimated variance-covariance matrix of the white noise disturbance process becomes non-symmetric. This inconsistency can cause a breakdown when testing financial theory. The paper provides a consistent adjustment which fits with the theory. The practical use of the adjustment is demonstrated in a vector system comprising variables from the Hong Kong stock market and foreign exchange markets.

Keywords: foreign exchange market; time series; VAR models; Yule-Walker relations

JEL Classification: C13, C32, C63, G10, G15

Suggested Citation

Brailsford, Timothy John and Penm, Jack and Terrell, R. Deane, The Adjustment of the Yule-Walker Relations in VAR Modeling: The Impact of the Euro on the Hong Kong Stock Market (July 7, 2015). Multinational Finance Journal, Vol. 5, No. 1, p. 35-58, 2001, Available at SSRN: https://ssrn.com/abstract=2627649

Timothy John Brailsford (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia

HOME PAGE: http://www.bond.edu.au

Jack Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management ( email )

Sir Roland Wilson Building (120)
Canberra, Australian Capital Territory 0200
Australia

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