Abstract
This paper investigates the dynamic correlations between the G7 economies and China by using the EGARCH/DCC models proposed by Engle and Figlewski (). We find that the correlations between the G7 economies can be captured by a one‐factor model when either the realized or implied volatilities are used. Although no significant correlations between China and the G7 countries are captured using realized volatilities, we find that the correlations increased during the 2008 financial crisis. Furthermore, we show that the one‐factor model is useful for hedging the volatility risks of individual countries.
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