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Measuring spot variance spillovers when (co)variances are time-varying – the case of multivariate GARCH models

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  • Fengler, Matthias R.
  • Herwartz, Helmut

Abstract

In highly integrated markets, news spreads at a fast pace and bedevils risk monitoring and optimal asset allocation. We therefore propose global and disaggregated measures of variance transmission that allow one to assess spillovers locally in time. Key to our approach is the vector ARMA representation of the second-order dynamics of the popular BEKK model. In an empirical application to a four-dimensional system of US asset classes - equity, fixed income, foreign exchange and commodities - we illustrate the second-order transmissions at various levels of (dis)aggregation. Moreover, we demonstrate that the proposed spillover indices are informative on the value-at-risk violations of portfolios composed of the considered asset classes.

Suggested Citation

  • Fengler, Matthias R. & Herwartz, Helmut, 2015. "Measuring spot variance spillovers when (co)variances are time-varying – the case of multivariate GARCH models," Economics Working Paper Series 1517, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2015:17
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    More about this item

    Keywords

    Multivariate GARCH; spillover index; value-at-risk; variance spillovers; variance decomposition;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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