On detection of volatility spillovers in overlapping stock markets

Revealing financial interactions

“…4 But fortunately this problem can still be solved in actual empirical applications. In this paper, I follow Kohonen (2013) and fully identify of the T-SVAR model by referring to some external source of information.…”

“…Following Kohonen (2013), I solve this label switching problem by ordering information contained in some proxy variable in this paper. Kohonen (2013) argues that if we can find a proxy variable that provides information on the ordering of the diagonal elements of Σ ε , then it becomes possible for us to pick the correct global estimation of the SVAR model among the local ML estimations. For example, if Y t represents the returns of the stock markets in several countries, then the size of return shocks indicated by Σ ε can be proxied by the magnitude of news in each country.…”

“…Based on the theoretical model of King and Wadhwani (1990), Kohonen (2013) suggests to use the magnitude of news in each market,which is extracted from Google Trends Indices (GTIs), as the proxy variable to attain the correct permutation of the columns of covariance matrix decompositionsΩ 1 andΩ 2 . The idea is simple: the GTI of a certain term indicates the relative volumes of weekly queries of the term on Google.…”

“…In this paper, the global identification is achieved with the help of GTI, too. The search terms are also the same as Kohonen (2013), which can be found in Table 4.6.1. The trends of the GTIs for these search terms can be found in In order to apply the Google Trends data to the T-SVAR model, we have to first extract the information on news magnitude from the raw data series, and then use it to pin down the correct permutations of the columns ofΩ 1 andΩ 2 .…”

“…Kohonen (2013), I select five representative countries to study the contagion inEurozone stock markets, namely Greece (GR), Germany (DE), Italy (IT), Spain (ES), and Ireland (IE). I let the data determine the contagion and non-contagion regimes according to the iTraxx Europe, a Europrean credit default swap (CDS) index.…”