Bivariate and higher-order terms in models of international equity returns

Kirt Butler and Katsushi Okada

Applied Financial Economics, 2007, vol. 17, issue 9, 725-737

Abstract: Nonsynchronous measurement induces significant higher-order auto and serial cross correlations in observed bivariate returns and squared returns to international equity indices. In order to investigate the statistical and economic significance of bivariate and higher-order terms in conditional models of international equity returns, we fit a VMA(2)-EGARCH(2,2) model with normal errors and a constant conditional correlation using MSCI index pairs for Japan, the UK and the USA. First-order univariate and bivariate conditional mean and volatility terms are statistically significant in each series. Second-order own- and cross-volatility terms also are significant, although second-order conditional mean terms are not. We investigate the economic significance of bivariate and second-order terms by comparing the return and volatility predictions of various models using out-of-sample regressions of returns or squared returns on conditional means or volatilities. Bivariate terms significantly improve return prediction in three of six series and volatility prediction in one of six series. Higher-order conditional volatility terms do not improve predictions of returns and squared returns despite the fact that they are statistically significant in these series. We conclude that it is important to include cross-effects, but not higher-order effects, when modelling conditional returns to international stock market indices.

Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603100600735328 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apfiec:v:17:y:2007:i:9:p:725-737

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603100600735328

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().