Journal of Risk Model Validation

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The use of range-based volatility estimators in testing for Granger causality in risk on international capital markets

Marcin Fałdziński and Magdalena Osińska

  • Range-based volatility estimators combined with GARCH model and peaks over threshold approach
  • Regulator’s and firm’s loss functions and Diebold-Mariano test as criteria of the models’ comparison
  • Causality in risk analysis among emerging and developed stock markets using different volatility models
  • Risk spillovers from emerging to developed markets more intensive in turbulent periods

This study utilizes the extreme value theory (EVT) approach to compare the performance of a wide variety of range-based volatility estimators in the analysis of causality in risk between emerging and developed markets. The AR(1)-GARCH(1,1) model with t-distribution is used as a benchmark. Regulator and firm loss functions are used to select the best volatility model. Two tests of causality in risk are used in our empirical study. The AR-GARCH model with EVT outperforms the other approaches in the case of huge risk. Among the most likely risk-taking markets are Standard & Poor's 500, CAC 40, Nikkei 225, Nasdaq and FTSE 100.

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