Francisco J. Climent

Volatility Transmission Models: A Survey

This study reviews the literature on volatility transmission in order to determine what we have learnt about the different methodologies applied. In particular, GARCH, regime switching and stochastic volatility models are analysed. In addition, this study covers several concrete aspects such as their scope of application, the overlapping problem, the concept of efficiency and asymmetry modelling. Finally, emerging topics and unanswered questions are identified, serving as an agenda for future research.

Volatility Transmission Patterns and Terrorist Attacks

The objective of this study is to analyze volatility transmission between the US and Eurozone stock markets considering the effects of the September 11, March 11 and July 7 financial crises. In order to do this, we use a multivariate GARCH model and take into account the asymmetric volatility phenomenon, the non-synchronous trading problem and the crises themselves. Moreover, a graphical analysis of the Asymmetric Volatility Impulse-Response Functions (AVIRF) is introduced, which takes into consideration the crisis effect. Results suggest that there is bidirectional and asymmetric volatility transmission and show the different impact that terrorist attacks had on both markets.

Region Vs. Industry Effects and Volatility Transmission

This article presents an analysis of the relative importance of region versus industry effects in stock returns, as opposed to the extensively analyzed country versus industry effects. The sample includes the period after the bursting of the technology bubble. Moreover, volatility transmission patterns are analyzed within an industry across regions to assess whether the same international links found in aggregate stock market indices exist at the industry level. The results confirm the dominance of region effects over industry effects, except during the bubble period. The results of the volatility transmission analysis suggest that the importance of spillovers depends on the industry. In recent years, the enhanced availability of financial information has strengthened existing relationships among stock markets. This development could have resulted in portfolio managers changing their investing strategies from country based to industry based to achieve optimal portfolio diversification. For this reason, whether return variations are driven primarily by geographical (or national) factors or by industry factors is important for practitioners and has long been a challenging area of research for academics. In fact, numerous studies have addressed the question of the relative importance of cross-country versus cross-industry diversification. The mixed empirical results presented in the literature suggest that the importance of country and industry factors may have been changing over time. We analyze this issue from a regional perspective rather than a country perspective. The article has two main thrusts. First, we analyze the relative importance of region versus industry effects in stock returns by using a sample that includes the period during and after the telecommunications/media/technology (TMT) bubble. Second, we analyze patterns of volatility transmission within an industry across regions to assess whether the same international links found in aggregate stock market indices exist at the industry level. The dataset consists of daily price indices in U.S. dollars for 10 industry indices in three regions (North America, Europe, and Asia)—all collected from Datastream. The sample is from January 1995 through December 2004 and is also divided into three subperiods to isolate the TMT bubble and ensuing crisis. To analyze the relative importance of region and industry effects, we used a dummy variable approach. The results confirm the overall dominance of region effects over industry effects except during the TMT crisis period. To analyze volatility transmission patterns within an industry across regions, we estimated a trivariate first-order vector autoregressive [VAR(1)]–asymmetric BEKK model for each of the 10 industries. In this case, the results suggest that spillovers are more or less important depending on the industry being analyzed. For example, the information technology industry was less affected by other international markets. The implication of our research for investors is that now that the TMT financial crisis is over, the traditional strategy of diversifying across countries or regions rather than by industries may still be adequate in terms of reducing portfolio risk. Of course, the most risk reduction will be achieved by taking into account the volatility transmission patterns found in this study and diversifying both across regions and across industries.

Extreme value theory versus traditional GARCH approaches applied to financial data: a comparative evaluation

Although stock prices fluctuate, the variations are relatively small and are frequently assumed to be normally distributed on a large time scale. But sometimes these fluctuations can become determinant, especially when unforeseen large drops in asset prices are observed that could result in huge losses or even in market crashes. The evidence shows that these events happen far more often than would be expected under the generalised assumption of normally distributed financial returns. Thus it is crucial to model distribution tails properly so as to be able to predict the frequency and magnitude of extreme stock price returns. In this paper we follow the approach suggested by McNeil and Frey in 2000 and combine GARCH-type models with the extreme value theory to estimate the tails of three financial index returns – S&P 500, FTSE 100 and NIKKEI 225 – representing three important financial areas in the world. Our results indicate that EVT-based conditional quantile estimates are more accurate than those from conventional GARCH models assuming normal or Students t distribution innovations when doing not only in-sample but also out-of-sample estimation. Moreover, these results are robust to alternative GARCH model specifications. The findings of this paper should be useful to investors in general, since their goal is to be able to forecast unforeseen price movements and take advantage of them by positioning themselves in the market according to these predictions.

Information flows among the major stock market areas

The relationship between the index returns of the major stock markets has been analysed in many papers. These studies usually examine lead-lag relationships between markets, without distinguishing the influencing ability and the sensitivity of each of the markets. Additionally, these studies use indices that are not directly comparable - either because of the way the indices are calculated or because of the number of companies and sectors used to construct them. This paper addresses both points. Firstly, all the analyses have been made using homogeneous indices designed by Morgan Stanley Capital International. Secondly, the information flow has been studied by applying the model proposed by Peiro et al. (1998). This model allows us to study the effective influence of one market on another by separating the capability to influence of the first and the sensitivity of the second. The obtained results indicate that during the period 1988-1993, the linkage among the major stocks markets were determined by the sensitivity of the market receiving the information; while in the period 1993-1998, the linkages are determined by the influencing ability.

Market efficiency and price discovery relationships between spot, futures and forward prices: the case of the Iberian Electricity Market (MIBEL)

ABSTRACT This paper analyses the relationships between prices from three different markets within the Spanish zone of the Iberian Electricity Market (MIBEL), namely futures, spot and over the counter (OTC) forward markets. The study focuses on three items: (i) contrasting the Weak-form efficiency hypothesis of the markets involved in the study, (ii) analysing the Semi-strong-form efficient market hypothesis (EMH) of the MIBEL futures market and (iii) examining the price discovery relationships between the series of prices of the considered markets. The empirical results confirm that 1-month-, 1-quarter-, 1-year-ahead futures and spot markets satisfy, generally, the Weak-form efficiency hypothesis and that MIBEL futures market does not contradict the EMH in its Semi-strong-form. In addition, price discovery relationships have also been found. In particular, there is unidirectional causality from the futures market to the forward market and from the futures market to the spot market for 1-month- and 1-quarter-ahead maturities. This result may be indicative of the agents to use the price of the futures market as a valuable reference.

Have Volatility Transmission Patterns between the USA and Spain Changed after September 11

On 11 September 2001, the USA experienced its most devastating terrorist attack. This attack had an influence over several economic variables and it obviously affected financial markets. Taking into account the increasing global financial integration, an important question arises: Could recent terrorist attacks have increased even more interrelations between financial markets?

La contribución de la Bolsa de Nueva York en el proceso de formación de precios de los principales ADRs españoles

RESUMEN Este trabajo estudia la contribución de la negociación en la Bolsa de Nueva York en el proceso de formación de precios de las principales acciones españolas negociadas en ese mercado. Con este fin, y teniendo en cuenta la existencia de un período diario en el que los dos mercados negocian simultáneamente, se utilizan Modelos de Corrección de Error para todas las empresas españolas cotizadas en la Bolsa de Nueva York durante el período 1994–2001. Los resultados obtenidos sugieren que la negociación en Nueva York tiene una contribución significativa en el proceso de formación de precios de las acciones analizadas.