Switching volatility in private international equity markets

Raúl Susmel

62 citations0/0 files storedInternational Journal of Finance & Economics

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

This paper analyzes the behavior of time-varying volatility when structural changes are allowed in international stock markets. A model developed by Hamilton and Susmel [(1994) Autoregressive conditional heteroskedasticity and changes in regime. Journal of Econometrics 64: 307–333], the switching autoregresive conditional heteroskedastic (SWARCH) model, which is a more general specification than the popular ARCH model, is used. An exponential SWARCH model is fitted to eight series of weekly returns from international stock markets. Evidence is found for switching volatility for the US, Canada, the UK, and Japan. Under the SWARCH model, it is found that ARCH and asymmetric effects are reduced when a switching regime structure is allowed. The switching model is used to date volatility states in international stock markets. These states are compared and it is concluded that domestic volatility states tend to be independent of foreign volatility states, with the exception of Japan and the UK, and the US and Canada. For these two pairs of series, evidence is found for common volatility states. Copyright © 2000 John Wiley & Sons, Ltd.

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1993On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks 1993Measuring and Testing the Impact of News on Volatility 1987A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return 1990Correlations in Price Changes and Volatility across International Stock Markets

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