Modelling and valuing multivariate interdependencies in financial time series

This thesis investigates implications of interdependence between stock market prices in the context of several financial applications including: portfolio selection, tests of market efficiency and measuring the extent of integration among national stock markets. In Chapter 2, I note that volatility spillovers (transmissions of risk) have been found in numerous empirical studies but that no one, to my knowledge, has evaluated their effects in the general portfolio framework. I dynamically forecast two multivariate GARCH models, one that accounts for volatility spillovers and one that does not, and construct optimal mean-variance portfolios using these two alternative models. I show that accounting for volatility spillovers lowers portfolio risk with statistical significance and that risk-averse investors would prefer realised returns from portfolios based on the volatility spillover model. In Chapter 3, I develop a structural MGARCH model that parsimoniously specifies the conditional covariance matrix and provides an identification framework. Using the model to investigate interdependencies between size-sorted portfolios from the Australian Stock Exchange, I gain new insights into the issue of asymmetric dependence. My findings not only confirm the observation that small stocks partially adjust to market-wide news embedded in the returns to large firms but also present evidence that suggests that small firms in Australia fail to even partially adjust (with statistical significance) to large firms shocks contemporaneously. All adjustments in small capitalisation stocks occur with a lag. Chapter 4 uses intra-daily data and develops a new method for measuring the extent of stock market integration that takes into account non-instantaneous adjustments to overnight news. This approach establishes the amounts of time that the New York, Tokyo and London stock markets take to fully adjust to overnight news and then uses this This thesis investigates implications of interdependence between stock market prices in the context of several financial applications including: portfolio selection, tests of market efficiency and measuring the extent of integration among national stock markets. In Chapter 2, I note that volatility spillovers (transmissions of risk) have been found in numerous empirical studies but that no one, to my knowledge, has evaluated their effects in the general portfolio framework. I dynamically forecast two multivariate GARCH models, one that accounts for volatility spillovers and one that does not, and construct optimal mean-variance portfolios using these two alternative models. I show that accounting for volatility spillovers lowers portfolio risk with statistical significance and that risk-averse investors would prefer realised returns from portfolios based on the volatility spillover model. In Chapter 3, I develop a structural MGARCH model that parsimoniously specifies the conditional covariance matrix and provides an identification framework. Using the model to investigate interdependencies between size-sorted portfolios from the Australian Stock Exchange, I gain new insights into the issue of asymmetric dependence. My findings not only confirm the observation that small stocks partially adjust to market-wide news embedded in the returns to large firms but also present evidence that suggests that small firms in Australia fail to even partially adjust (with statistical significance) to large firms shocks contemporaneously. All adjustments in small capitalisation stocks occur with a lag. Chapter 4 uses intra-daily data and develops a new method for measuring the extent of stock market integration that takes into account non-instantaneous adjustments to overnight news. This approach establishes the amounts of time that the New York, Tokyo and London stock markets take to fully adjust to overnight news and then uses this

Grantor dc:publisher

UNSW, Sydney

Year dc:date

2006

Author dc:creator

• Milunovich, George

• Stock exchanges
• Portfolio management
• Stocks - Prices - Econometric models
• International economic integration

Statement dc:rights

• open access
• CC BY-NC-ND 3.0
• free_to_read

Licence

• https://purl.org/coar/access_right/c_abf2
• https://creativecommons.org/licenses/by-nc-nd/3.0/au/

Language dc:language

EN

Identifier

https://doi.org/10.26190/unsworks/15173

OAI identifier oai:identifier

oai:unsworks.library.unsw.edu.au:1959.4/25162