Multivariate BEKK-TGARCH approach to testing and predicting volatility spillovers & leverage effects

We investigate volatility linkages among stock, bond, and money markets to better understand the dynamic structure of the domestic financial markets. This paper explores sources of volatility and volatility spillovers across markets due to news information. We propose a VAR-BEKK-GJR-GARCH volatility model to assess linkages across asset markets. The model is estimated by the maximum likelihood method with multivariate t - innovation density. The asymptotic chi-square tests for volatility spillovers and leverage effects are constructed. The model is utilized to predict asset volatility and time varying correlation of volatility. Application of the proposed model to the Australia’s domestic stock, bond, and money markets reveals that the domestic financial markets are interdependent and predictable. In general, volatility spillovers from stock market to bond and to money markets occur simultaneously due to common news. The empirical findings of this paper quantifies the association among security markets which can be utilized for improving agents’ decision making strategies for risk management and, portfolio selection and diversification