Modelling the interactions across international stock, bond and foreign exchange markets

Abdul Hakim

Research output: ThesisDoctoral Thesis

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Abstract

[Truncated abstract] Given the theoretical and historical evidence that support the benefit of investing internationally. there is Iittle knowledge available of proper international portfolio construction in terms of how much should be invested in foreign countries, which countries should be targeted, and types of assets to be included in the portfolio. The prospects of these benefits depend on the market volatilities, cross-country correlations, and currency risks to change in the future. Another important issue in international portfolio diversification is the growth of newly emerging markets which have different characteristics from the developed ones. Addressing the issues, the thesis intends to investigate the nature of volatility, conditional correlations, and the impact of currency risks in international portfolio, both in developed and emerging markets. Chapter 2 provides literature review on volatility spillovers, conditional correlations, and forecasting both VaR and conditional correlations using GARCH-type models. Attention is made on the estimated models, type of assets, regions of markets, and tests of forecasts. Chapter 3 investigates the nature of volatility spillovers across intemational assets, which is important in determining the nature of portfolio's volatility when most assets are seems to be connected. ... The impacts of incorporating volatility spillovers and asymmetric effect on the forecast performance of conditional correlation will also be examined in this thesis. The VARMA-AGARCH of McAleer, Hoti and Chan (2008) and the VARMA-GARCH model of Ling and McAleer (2003) will be estimated to accommodate volatility spillovers and asymmetric effect. The CCC model of Bollerslev (1990) will also be estimated as benchmark as the model does not incorporate both volatility spillovers and asymmetric effects. Given the information about the nature of conditional correlations resulted from the forecasts using a rolling window technique, Section 2 of Chapter 4 investigates the nature of conditional correlations by estimating two multivariate GARCH models allowing for time-varying conditional correlations, namely the DCC model of Engle (2002) and the GARCC model of McAleer et al. (2008). Chapter 5 conducts VaR forecast considering the important role of VaR as a standard tool for risk management. Especially, the chapter investigates whether volatility spillovers and time-varying conditional correlations discussed in the previous two chapters are of helps in providing better VaR forecasts. The BEKK model of Engle and Kroner (1995) and the DCC model of Engle (2002) will be estimated to incorporate volatility spillovers and conditional correlations, respectively. The DVEC model of Bollerslev et al. (1998) and the CCC model of Bollerslev (1990) will be estimated to serve benchmarks, as both models do not incorporate both volatility spillovers and timevarying conditional correlations. Chapter 6 concludes the thesis and lists somc possible future research.
Original languageEnglish
QualificationDoctor of Philosophy
Publication statusUnpublished - 2009

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