Journal of Financial and Quantitative Analysis - Accounting and Finance Assignment Help

Assignment Task

Models typically outperform standard volatility models in three respects. First,  GARCH models cannot account for the empirical regularity that the persistence  of stock return volatility is considerably lower in periods of high volatility than in tranquil periods. Lamoureux and Lastrapes (1990), Hamilton and Susmel (1994),  and Cai (1994) argue that not accounting for these structural shifts in the volatil  ity process causes GARCH models to overestimate the persistence of volatil  ity. Second, multiple regime models tend to produce better volatility forecasts  than asymmetric GARCH models (see, e.g., Marcucci (2003)).

 Bekaert (2002b) show that regime-switching volatility models do capture correla  tion asymmetry, that is, the fact that correlations are larger when returns are low  than when they are high, whereas (asymmetric) GARCH models fail to do so. economic (and monetary) union offers an ideal test 

 for the main hypothesis in this paper. Third, Western Europe may hold important  lessons for the recently emerged equity markets in Central and Eastern European  Countries (CEEC), which are about to embark on an integration process with  Western European countries. 

 The main results in this paper can be summarized as follows. I find that the  regime switches in the spillover intensities are both statistically and economically  important. For nearly all countries, the probability of a high regional (Europe)  and global (U.S.) shock spillover intensity increased significantly over the 1980s  and 1990s, with the increase more pronounced for the sensitivity to European  shocks. The European shock spillover intensity increased primarily in the sec  ond half of the 1980s and the first half of the 1990s, suggesting that economic  integration as well as efforts to further liberalize European capital markets were more important in bringing markets closer together.

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