VAR-GARCH Model Research Articles

Construction of multi-step forecast regions of VAR processes using ordered block bootstrap

In this study, an ordered non-overlapping block bootstrap procedure has been proposed to obtain multi-step forecast regions for unrestricted vector autoregressive models. The proposed method is not based on either backward or forward representations, so it can be implemented to VARMA or VAR-GARCH models. Also, it is computationally more efficient than the existing techniques. Its finite sample performance is investigated by Monte Carlo experiments and two-real world examples. Our findings show that the proposed method is a good alternative to the available resampling methods and produces better results for long-term forecasting when the model is near non-stationary or near-cointegrated.

The impact of investor sentiment on crude oil market risks: evidence from the wavelet approach

Investor sentiment has become an important factor affecting oil price volatility and extreme risk. Therefore, we utilise a VaR-GARCH model to detect the extreme risk of the crude oil market during 2007–2017, and then explore the causality between investor sentiment and extreme risk in the crude oil market, and their lead-lag and co-movement relationships in the time-frequency domain. The empirical results show that: firstly, investor sentiment leads downside risk but lags the upside risk in the crude oil market; secondly, in the time domain, there is a co-movement between investor sentiment and extreme risk in the crude oil market, in particular, investor sentiment may Granger cause extreme risk in the crude oil market at the 1% significance level but not vice versa; thirdly, in the frequency domain, weak coherence can be found in high-frequency bands but increases in low-frequency bands during the whole sample period, which indicates that the impact of investor sentiment on extreme risk in the crude oil market will last for a long time, although the affected period tends to decrease.

Interactions between stock prices and exchange rates: An application of multivariate VAR-GARCH model

The study examined stock prices (SP) and exchange rate (ER) interactions with multivariate VAR-GARCH model using monthly data from January 2000 to October 2014. The results of the Engle and Granger...

Exchange rates and macro news in emerging markets

This paper uses a VAR-GARCH(1,1) model to analyse mean and volatility spillovers between macro news (in the form of newspaper headlines) and the exchange rates vis-a-vis both the US dollar and the euro of the currencies of a group of emerging countries including the Czech Republic, Hungary, Indonesia, Korea, Mexico, Poland, South Africa, Thailand and Turkey over the period 02/1/2003–23/9/2014. The results suggest limited dynamic linkages between the first moments compared to the second moments, causality-in-variance being found in a number of cases; further, the recent global financial crisis appears to have had a significant impact. The conditional correlations also provide evidence of co-movement. Finally, as expected the impact of news is more muted in the case of managed currencies, significant spillovers only being found in the case of foreign news in the crisis period.

Return, volatility and shock spillovers of Bitcoin with energy and technology companies

We employ an asymmetric multivariate VAR-GARCH model to study spillover effects between Bitcoin and energy and technology companies. We find unilateral return and volatility spillovers and bidirectional shock influences and demonstrate portfolio management implications of dynamic conditional correlations.

Mercados Financeiros Internacionais: Uma Aplicação da Análise de Componentes Principais em Dados Dependentes

Este trabalho analisou o padrão de integração (co-movimentos) dos mercados financeiros internacionais de 25 países, no período de 1997 a 2015, por meio da análise de componentes principais, aplicada aos resíduos do modelo VAR-GARCH. Os resultados revelaram que, no período da crise do subprime, existiu uma substancial elevação da integração entre os países, em termos de co-movimentos dos índices financeiros (“efeito contágio”), especialmente para aos países desenvolvidos. No decorrer do período de análise, os países asiáticos alcançaram a segunda posição no que diz respeito ao percentual de explicação da variabilidade dos índices de retornos e observou-se o crescimento da participação individual da China. Mesmo ao longo do tempo, as características econômicas, políticas e geográficas parecem ser fundamentais em termos de integração financeira por parte dos países.

The interactions between OPEC oil price and sectoral stock returns: Evidence from China

This paper examines the volatility spillover between OPEC oil price and the Chinese sectoral stock returns from December 31, 2004 through October 17, 2014. In order to achieve this task, we used the VAR-GARCH model for the daily closing prices of six sectoral stock indices including: Construction, Machinery, Automobile, Military, Agriculture, and Financial indices. In addition, we analyzed the optimal weights and hedge ratios for oil–stock portfolio holdings. The findings show significant volatility spillover between OPEC oil prices and the Chinese sectoral stock returns. The volatility spillover is unidirectional from oil to stock returns. The spillover effects mainly come from past shocks. The past oil shocks have negative and significant impact on the conditional volatility of Construction, Machinery, Automobile, Military and Agriculture stock indices. On the contrary, with the exception of the Military stock index, there is no significant impact of the past stock return shocks on the volatility of oil returns. Moreover, our findings for optimal weights and hedge ratios suggest that oil can improve the risk-adjusted performance of a well-diversified portfolio of stocks.

Political Tension and Stock Markets in the Arabian Peninsula

This note investigates the effects of the recent political tensions in the Arabian peninsula on the linkages between the stock markets of the leading GCC countries by estimating a VAR-GARCH (1,1) model at a weekly frequency. The results indicate that the June 2017 crisis lowered stock market returns and generally led to greater volatility spillovers within the region. This evidence supports the need for further financial integration and suggests fewer portfolio diversification opportunities for investors in the GCC region.

A note on the implied volatility spillovers between gold and silver markets

While a large number of studies estimate the volatility spillover effects between gold and silver returns, none of them employs the implied volatilities of these two metal markets to assess such uncertainty transmission relationship. Our paper aims to fill this void in the existing literature. At the empirical stage, we make use of two different forms of the bivariate VAR-GARCH model to investigate the implied volatility spillovers between gold and silver markets. Our findings suggest that return and shocks significantly run from gold VIX (GVZ) to silver VIX (VXSLV), but not the other way around. In addition, we show that portfolio risk can be diversified if investors hold options in both gold and silver markets. Our findings are robust with respect to various VAR-GARCH models used in the empirical investigation.

Institutional Investors and Stock Market Volatility

This paper uses the 111 hybrid funds in 10 years which are across the two bull markets data to calculate institutional investors’ active position. Using Granger causality test, VAR dynamic impact model and GARCH model, we find that the behavior of institutional investors directly affect the stock market returns and exacerbate market volatility. Therefore, institutional investors are not market stabilizers.

Implied volatility linkages between the U.S. and emerging equity markets: A note

This paper investigates stock market integration among the U.S. and two leading emerging markets—China and Brazil—using their implied volatility indexes published by the Chicago Board of Options Exchange (CBOE). Employing ARDL bound tests, we find strong evidence of long-run transmission of uncertainty from the U.S. market to other markets. Additionally, results from a bivariate VAR-GARCH model indicate high correlations among the equity markets, which may diminish the gains from portfolio diversification between the U.S. market and the emerging markets under study. Finally, the Toda-Yamamoto version of the Granger causality test also suggests significant links among the volatility indexes under study.

Forecasting the Term Structure of South African Government Bond Yields

ABSTRACTThis article uses the parsimonious dynamic Nelson–Siegel model to fit the yields of South African government bonds. We find that the dynamic Nelson–Siegel model has good fitting abilities for all maturities. We further forecast the term structure by seven different dynamic Nelson–Siegel models with time series models. We find that the DNS–VAR–GARCH model is useful for forecasting the short-term rates, the DNS–VAR best predicts the medium-term rates, and the DNS–RW best predicts the long-term rates. In addition, the dynamic Nelson–Siegel models provide better forecasts of yield data than a random walk model, especially for the 12-month forecasting horizons.

Macro news and bond yield spreads in the euro area

ABSTRACTThis paper analyses the effects of newspaper coverage of macro news on the spread between the yield on the 10-year German Bund and on sovereign bonds in eight countries belonging to the euro area (Belgium, France, Greece, Ireland, Italy, the Netherlands, Portugal and Spain) using daily data for the period 1999–2014. The econometric analysis is based on the estimation of a VAR-GARCH model. The results can be summarized as follows. Negative news have significant positive effects on yield spreads in all GIIPS (Greece, Ireland, Italy, Portugal and Spain) countries but Italy before September 2008; markets respond more to negative news, and their reaction has increased during the recent financial crisis. News volatility has a significant impact on yield spread volatility, the effects being more pronounced in the case of negative news and bigger in the most recent crisis period, especially in the GIIPS countries. Further, the conditional correlations between yield spreads and negative news increase in absolute value during the financial crisis (especially in the GIIPS countries), indicating a higher sensitivity of the former to the latter.

Bank Capitalisation and Stock Market Liquidity: Assessing the Evidence

This paper provides both theoretical and empirical evidence for assessing the relationship between bank capitalisation and stock market liquidity. It estimates a bivariate VAR-GARCH (1.1) model to examine the linkage between bank capitalisation and stock market liquidity in Nigeria using annual data covering the period from 1986 to 2014. The findings of this paper show that bank capitalisation enables banks to give out more loans to the public and this increase in lending has a positive impact on stock market liquidity growth. The findings support the view that capitalised banks are well equipped to absorb and diversify risk, give out more loans, improve liquidity in the economy and improve stock market performance.

Oil and non-energy commodity markets: An empirical analysis of volatility spillovers and hedging effectiveness

AbstractAlthough a large number of empirical papers have examined the price spillover in global oil and non-energy commodity markets, very little is known about the volatility transmission between these two markets. The present study aims to conceal this gap by investigating the volatility cross effects between oil and three different non-energy commodity markets. Using the bivariate VAR-GARCH models, we do not find any evidence of volatility linkage between oil and agricultural product markets during the sample period used. We, however, document that oil market sends volatility to both metal and non-energy aggregate markets. This finding is not surprising, since petroleum-related products are one of the major production inputs in metal industries and hence the production process of metals largely depends on the crude oil market. Since various financial assets are traded on the basis of commodity markets, our results are beneficial for portfolio diversification and hedging decisions. Policy-makers could a...

Macro News and Exchange Rates in the BRICS

This paper examines the effects of newspaper headlines on the exchange rates visa-a-vis both the US dollar and the euro for the currencies of the BRICS (Brazil, Russia, India, China and South Africa). The data are daily and cover the period 03/1/2000-12/5/2013. The estimated VAR-GARCH(1,1) model allows for both mean and volatility spillovers and for the possible impact of the recent financial crisis as well. The results differ across countries, but provide in a number of cases evidence of significant spillovers, whose strength appears to have increased during the crisis. Further, given the increasingly global role of these countries, their FX markets have become more responsive to foreign news.

Macro news and exchange rates in the BRICS

This paper examines the effects of newspaper headlines on the exchange rates vis-a-vis both the US dollar and the euro for the currencies of the BRICS (Brazil, Russia, India, China and South Africa). The data are daily and cover the period 03/1/2000–12/5/2013. The estimated VAR-GARCH(1,1) model allows for both mean and volatility spillovers and for the possible impact of the recent financial crisis as well. The results differ across countries, but provide in a number of cases evidence of significant spillovers, whose strength appears to have increased during the crisis. Further, given the increasingly global role of these countries, their FX markets have become more responsive to foreign news.

An Empirical Analysis of Volatility Characteristics of Inter-Bank Offered Rate of International Financial Centers

This paper compares the trails of volatility of the inter-bank offered rate of five international financial centers with that of Shanghai Inter-Bank Offered Rate (Shibor), using VaR-GARCH model. Considering the influences of local lending rate system and economic environment, it also provides policy implications to improve the pricing approach of Shibor and the revolution of marketization of interest rate, and to increase the reference value of Shibor. Previous research usually analyzes the volatility of the lending rate of one or two markets with the same currency. However, this paper compares Shibor with lending rates of five different global financial centers, which helps correct Shibor’s pricing system and the market it involves. Moreover, this paper uses various kinds of models from the GARCH family to find the optimal one for each market, instead of modelling all different rates with the same model. By doing so it can obtain the model which matches each market best and increase the accuracy of the results.

Spillovers between food and energy prices and structural breaks

This paper estimates a bivariate VAR-GARCH(1,1) model to examine linkages between food and energy prices. The adopted framework is suitable to analyse both mean and volatility spillovers, and also allows for possible parameter shifts resulting from four recent events, namely: (1) the 2006 food crisis, (2) the Brent oil bubble, (3) the introduction of the Renewable Fuel Standard (RFS) policy, and (4) the 2008 global financial crisis. The empirical findings suggest that there are significant linkages between food and both oil and ethanol prices. Further, the four events considered had mixed effects, the 2006 food crisis and 2008 financial crisis leading to the most significant shifts in the (volatility) spillovers between the price series considered.

Price Discovery and Information Transmission in Stock Index Futures and Spot Markets: Evidence from China based on a VAR-GARCH Model with SSAEPD Margins

Using daily data, this paper empirically investigates the price discovery and information transmission in China's stock index futures and spot markets based on a VAR-GARCH model with SSAEPD margins. By comparing our model with classic VAR-GARCH model, we discover that our model can better capture the skewness, fat-tailness and asymmetric kurtosis in our data and has better in-sample fit than the VAR-GARCH model. Then, we use our model to conduct structural analysis. Causality Analysis, Impulse Response Function and Volatility Impulse Response Function indicate that there exists a significant bidirectional price causal relationship between the index futures and spot returns. And China's index futures market function very well in its price discovery performance, since the index futures market is found to lead the underlying spot market and plays a more dominant role in the price discovery process. Besides, Volatility Impulse Response Function also shows a higher investment risk in index futures market compared with index spot markets.