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Spatial GARCH models for unknown spatial locations – an application to financial stock returns

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  • Markus J. Fülle
  • Philipp Otto

Abstract

Spatial GARCH models, like all other spatial econometric models, require the definition of a suitable weight matrix. This matrix implies a certain structure for spatial interactions. GARCH-type models are often applied to financial data because the conditional variance, which can be translated as financial risks, is easy to interpret. However, when it comes to instantaneous/spatial interactions, the proximity between observations has to be determined. Thus, we introduce an estimation procedure for spatial GARCH models under unknown locations employing the proximity in a covariate space. We use one-year stock returns of companies listed in the Dow Jones Global Titans 50 index as an empirical illustration. Financial stability is most relevant for determining similar firms concerning stock return volatility.

Suggested Citation

  • Markus J. Fülle & Philipp Otto, 2024. "Spatial GARCH models for unknown spatial locations – an application to financial stock returns," Spatial Economic Analysis, Taylor & Francis Journals, vol. 19(1), pages 92-105, January.
    • Handle: RePEc:taf:specan:v:19:y:2024:i:1:p:92-105
    DOI: 10.1080/17421772.2023.2237067
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