A MEM-based Analysis Of Volatility Spillovers In East Asian Financial Markets

Transmission mechanisms in financial markets reflect the degree of integration of capital markets, as well as the relative importance of real economies. Market volatility has components which may behave differently across quiet and turbulent periods, but appear to behave in similar ways from market to market. In this paper the authors suggest a Multiplicative Error Model (MEM) approach to study volatility spillovers among a set of markets, using as a proxy, the market daily range. They model the dynamics of the expected volatility of one market including interactions with the past daily ranges of other markets, building a fully interdependent model.