Volatility Transmission in Global Financial Markets Harvard Case Solution & Analysis

Aim:

The purpose of the research paper is to analyze and determine the volatility in the financial markets around the globe that consist of foreign exchange, equity and bond markets.

Motivation:

The research reason behind the investigation is the increasing importance of the volatility patterns in the financial markets. As, there is a great impact of volatility transmission in the global financial assets that are trading on the different financial markets due to the fact that volatility affects the decision making that are taking place every day in the global financial markets. Another reason is that, it is vital to analyze the factors due to which instability in the financial markets of foreign exchange bonds and equity occured.

Literature Review:

The importance of the volatility in financial assets has been constantly focused in the previous work conducted by the authors. The volatility has been considered as observed element in most of the current developments that is anticipated from return of high frequency financial asset. The most of the work is related to the predicting the volatility as well as modeling of the volatility path of an asset in any particular financial market around the world (Hansen et al, 2012).

Moreover, the analysis of the transmission of volatility through financial markets of world’s different regions (Asia, Europe, United State and Japan) for the period of financial trading day has been investigated by the several authors as well as international volatility linkages among mentioned regions in the foreign exchange market perspective. In addition to this,(Engle et al,1990) has investigated on the two different patterns of the volatility that consist of heat wave a in order to determine the volatility in one region that is a function of volatility of previous day in the similar region. Another pattern is the meteor shower where any particular region volatility is reflected by its immediate preceding in term of calendar time. However, it is concluded from the evaluation of the previous researches performed by many authors on the volatility in the financial markets assets that meteor shower is the best pattern in order to analyzed the volatility in the foreign exchange market preformed. Whereas, on the other side, heat wave pattern best describes the volatility behavior in the financial assets/securities trading in bonds and equity markets.

Hypotheses (or Theory):

 Following are the hypothesis for getting the results related to the volatility in global financial markets:

  •  The author has developed the hypotheses for both the patterns, for heat wave and meteor shower.
  •  The equation of hypotheses is ht=K+Aht-1 + BRSt+   + BRSt- + GE2t-1    
  • The hypotheses are based intra-day effects of the realized volatility that explains the conditional variance as well as the relative importance volatility diffusive component in relation with the jump component.
  •  Hypotheses are also developed in order to determine the level of instability in the three selected financial markets

Method (or Research Design):

  • The method that has been used to find out the results of the study is multivariate GARCH framework that consists of realized volatility measures as explanatory variables.
  •  The research design based on the understandings and analysis of the past studies. The author has also revisits the heat waves and meteor showers framework investigated by the Engle et al in the year 1990.
  • The author has used 10 min data that is collected from the Thomson Reuters Ticket History in order to develop the series for the realized volatility for each and every financial asset that is trading on the financial markets of the selected regions.
  • The return in each region that is trading on three selected financial markets has been calculated in order to evaluate the estimated return.

Volatility Transmission in Global Financial Markets Case Solution

Data:

The author has collected high frequency {10min} dataset in order to conduct his research from the Thomson Reuters Tick History for the time period of 9 years from 3 Jan 2005 to 28 Feb 2013 of the instruments that are representative in the financial market (foreign exchange, bond and equity). The series of data that have been collected for the research include following:

  • Futures contracts of Euro-dollar United States that are traded on the Chicago Mercantile Exchange.
  • The Treasury bond futures contracts (10years) of united states that are traded on the bond market.

Futures contracts (S&P 500) that are traded on equity market.............................

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