# 17-022/III (2017-02-13)

Author(s)
Jinghui Chen, Yokohama National University, Japan; Masahito Kobayashi, Yokohama National University, Japan; Michael McAleer, National Tsing Hua University, Taiwan; Erasmus University Rotterdam, The Netherlands;Complutense University of Madrid, Spain; Yokohama National University, Japan
Keywords:
Lagrange multiplier test; Volatility co-movement, Stock markets, Exchange rate Markets, Financial crisis
JEL codes:
C12, C58, G01, G11

The paper considers the problem of volatility co-movement, namely as to whether two nancial returns have perfectly correlated common volatility process, in the framework of multivariate stochastic volatility models and proposes a test which checks the volatility co-movement. The proposed test is a stochastic volatility version of the co-movement test proposed by Engle and Susmel (1993), who investigated
whether international equity markets have volatility co-movement using the framework of the ARCH model.
In empirical analysis we found that volatility co-movement exists among closelylinked stock markets and that volatility co-movement of the exchange rate markets
tends to be found when the overall volatility level is low, which is contrasting to the often-cited nding in the nancial contagion literature that nancial returns have
co-movement in the level during the nancial crisis.