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Do Time-Varying Covariances, Volatility Comovement and Spillover Matter?

Author

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  • Lakshmi Balasubramanyan

    (Penn State University)

Abstract

Financial markets and their respective assets are so intertwined; analyzing any single market in isolation ignores important information. We investigate whether time varying volatility comovement and spillover impact the true variance-covariance matrix under a time-varying correlation set up. Statistically significant volatility spillover and comovement between US, UK and Japan is found. To demonstrate the importance of modelling volatility comovement and spillover, we look at a simple portfolio optimization application. A utility based comparison is used to evaluate the economic performance of the portfolio which considers time varying correlation with volatility comovement and spillover. This paper shows that a portfolio strategy incorporating time-varying correlation with asymmetric volatility comovement and spillover outperforms the constant correlation model without comovement and spillover by yielding the highest level of wealth and utility difference of up to 250 basis points.

Suggested Citation

  • Lakshmi Balasubramanyan, 2005. "Do Time-Varying Covariances, Volatility Comovement and Spillover Matter?," Finance 0509002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0509002
    Note: Type of Document - pdf; pages: 28
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    References listed on IDEAS

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    Cited by:

    1. Abdul Hakim & Michael McAleer, 2009. "VaR Forecasts and Dynamic Conditional Correlations for Spot and Futures Returns on Stocks and Bonds," CIRJE F-Series CIRJE-F-676, CIRJE, Faculty of Economics, University of Tokyo.
    2. Sinha, Pankaj & Sinha, Gyanesh, 2010. "Volatility Spillover in India, USA and Japan Investigation of Recession Effects," MPRA Paper 47190, University Library of Munich, Germany, revised 17 May 2013.
    3. Botshekan , Mohamad Hashem & Mohseni , Hosein, 2017. "Volatility Spillover among Industries in the Capital Market in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(2), pages 213-233, April.

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    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
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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