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2 edition of Volatility clustering and volatility transmission found in the catalog.

Volatility clustering and volatility transmission

M. J. Artis

Volatility clustering and volatility transmission

a non-parametric view of ERM exchange rates

by M. J. Artis

  • 343 Want to read
  • 10 Currently reading

Published by Centre for Economic Policy Research in London .
Written in English


Edition Notes

StatementMichael J. Artis and Wenda Zhang.
SeriesDiscussion paper series / Centre for Economic Policy Research -- No.1594
ContributionsZhang, Wenda., Centre for Economic Policy Research.
ID Numbers
Open LibraryOL22287371M

Second, we test two competing hypotheses on volatility clustering as first studied in Engle, Ito, and Lin (): the heat wave hypothesis refers to volatility clustering at a regional level--a high (low) volatility in a region today tends to be followed by a high (low) volatility in the same region on the following day. The problem is that this works both ways – on the upside and the downside. And when the market reverses the herd reverses course causing not only a negative psychological volatility cluster, but the margin call effect in which fund managers become FORCED sellers of positions.

Downloadable (with restrictions)! Abstract This paper examines the spillover effects of cluster volatility between the equity markets of the U.S. and four Asia-Pacific countries in the context of two significant U.S. market crises (the financial crisis of and the threat of the U.S. government refusing to raise its “debt ceiling” and subsequently defaulting on its debt in ). The introduction of generalized autoregressive conditional heteroscedastic (GARCH) modelling techniques to agricultural price analysis represents an important advancement, both because commodity prices often exhibit volatility clustering and because explicit estimation of conditional second moments is desirable where price risk influences production and marketing behavior.

the volatility clustering, an alternative approach is also needed while dealing with flnancial time series. For instance, if only the clustering behaviour is concerned, one can simply characterize this property by the concept of prob-ability. Table 1 is an example which shows the probability of the occurrence. We look at volatility clustering, and some aspects of modeling it with a univariate GARCH(1,1) model. Volatility clustering Volatility clustering — the phenomenon of there being periods of relative calm and periods of high volatility — is a seemingly universal attribute of market data. There is no universally accepted explanation of it.


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Volatility clustering and volatility transmission by M. J. Artis Download PDF EPUB FB2

In finance, volatility clustering refers to the observation, first noted by Mandelbrot (), that "large changes tend to be followed by large changes, of either sign, and small changes tend to be followed by small changes." A quantitative manifestation of this fact is that, while returns themselves are uncorrelated, absolute returns | | or their squares display a positive, significant and Modelling volatility: Implied volatility, Volatility.

The Behavior of Market Volatility. Time series of financial asset returns often demonstrates volatility clustering. In a time series of stock prices, for instance, it is observed that the variance of returns or log-prices is high for extended periods and then low for extended such, the variance of daily returns can be high one month (high volatility) and show low variance (low.

From Table 2, it shows the descriptive statistics for the volatility series of all the financial markets under the whole sample period (see Fig.

1).Drawing from Fig. 2, all the three-market pairs are volatile (though some are more volatile than others) with evidence of volatility clustering, i.e., periods of high volatility are followed by periods of relatively low by: 2.

From a practical standpoint, volatility clustering is important for everyone to understand: certainly options traders must (the options market already understands and (largely) prices for this effect, so you should too!), but active traders, portfolio managers, and risk managers also need to be aware of this.

Volatility Clustering and Autoregressive Conditional Heteroskedasticity. Financial time series often exhibit a behavior that is known as volatility clustering: the volatility changes over time and its degree shows a tendency to persist, i.e., there are periods of low volatility and periods where volatility is etricians call this autoregressive conditional heteroskedasticity.

volatility or a cyclical price movement with high volatility depending on market conditions. With the fundamental noise and noise traders, this triggers an irregular switching between two volatility regimes and therefore leads to volatility clustering.

In particular, the efiect becomes more signiflcant when traders switch their strategies. Volatility clustering Definition. Volatility Clustering is a phenomenon in time series of asset prices. In contrast to the often-assumed log-normal distribution of asset price returns, it is often observed that periods of high price volatility follow periods of low volatility and vice versa.

What is Volatility Clustering. Back in the early s, financial researcher Benoit Mandelbrot observed a phenomenon that occasionally and irregularly affects stock markets, which he called “Volatility Clustering.” Mandelbrot noted that when it comes to stock market volatility, large changes tend to follow large changes, of either sign, and.

The network clustering coefficient and small path length are also the important indicators. A high clustering coefficient indicates a small-world effect of the volatility network. The clustering coefficient vary from towhich is much larger than 0. This proves that the volatility spillover network has small-world characteristics.

Volatility Clustering in Financial Markets 3 2 Volatility clustering in financial time series Denote by St the price of a financial asset — a stock, an exchange rate or a market index — and Xt =lnSt its logarithm.

Given a time scale ∆, the log return at scale ∆ is defined as: rt = Xt+∆ −Xt =ln(St+∆ St (1). Volatility clustering is one of the most common stylized facts in financial time series; this phenomenon has intrigued many researchers and oriented in a major way the development of stochastic models in finance.

The study uses GARCH-type models to detect volatility clustering. GARCH-type models are widely used to test the volatility clustering. The volatility clustering feature implies that volatility (or variance) is auto-correlated.

In the model, this is a consequence of the mean reversion of volatility 1. There is a simple economic argument which justifies the mean reversion.

T urning to Fact 3, w e find evidence of volatility clustering in complex simula- tion studies of financial markets by Grannan and Swindle [19] and in the artificia l stock market of Arth ur et. Periods of high volatility tend to cluster together, as do periods of relative calm.

Different approaches to the measurement of volatility, from time-series analysis to options-based implied measures and the Yilmaz-Diebold model of volatility transmission, reveal feedback and spillover effects.

analyzing a complete order book by real-time simulation [13–15]. Regarding the volatility clustering, it is worth mentioning that Lux et al. [16] highlighted that volatility is explained by market instability.

Later, Raberto et al. [17] introduced an agent-based artificial market whose heterogeneous agents. Additionally, two volatility clustering periods where identified withing an sharp increase in conditional variance-covariance estimated by the diagonal BEKK model.

This provides evidence that the linkages between examined performance variables with the emerging technology phenomena is highly integrated and that volatility spillovers rise during. Volatility Clustering in U.S. Home Prices. Journal of Real Estate Research, Vol.

30, No. 1, 18 Pages Posted: 14 Dec Last revised: 30 Dec See all articles by William Miles William Miles. Return and Volatility Transmission in U.S. Housing Markets. A local analysis reveals that for some clusters, the cluster itself contributes statistically to the volatility clustering effect.

This is significantly advantageous over other factor models, since it offers a way of selecting factors in a statistical way, whilst also keeping economically relevant factors.

T1 - Volatility clustering. T2 - A nonlinear theoretical approach. AU - He, Xue Zhong. AU - Li, Kai. AU - Wang, Chuncheng. PY - / Y1 - / N2 - This paper verifies the endogenous mechanism and economic intuition on volatility clustering using the coexistence of two locally stable attractors proposed by Gaunersdorferet al.

On the other hand, agent-based models allow reproducing and explaining some stylized facts of financial markets [].Interestingly, several works have recently been appeared in the literature analyzing a complete order book by real-time simulation [13,14,15].Regarding the volatility clustering, it is worth mentioning that Lux et al.

[] highlighted that volatility is explained by market instability. Clustering volatility is shown to appear in a simple market model with noise trading simply because agents use volatility forecasting models.

At the core of the argument lies a feed-back mechanism linking past observed volatility to present observed volatility. Its stability.Summary. Time series of financial asset returns often exhibit the volatility clustering property: large changes in prices tend to cluster together, resulting in persistence of the amplitudes of price changes.

After recalling various methods for quantifying and modeling this phenomenon, we discuss several economic mechanisms which have been proposed to explain the origin of this volatility.Volatility clustering.

In this section we model the distribution of a continuous time process X t which features volatility clustering (), as discussed in Section We describe two approaches: stochastic volatility (Section ) and time-changed Brownian motion (Section ).It turns out that these two approaches are equivalent, as we discuss in Section