Testing for Extreme Volatility Transmission with Realized Volatility Measures

Mardi | 2016-11-29
16-17h20 en sully05

Sessi TOKPAVI – Christophe BOUCHER – Elena Ivona DUMITRESCU

This paper is about testing for volatility transmission between financial markets. The potential adverse e ffect of volatility spillover on fi nancial stability is a subject of great importance in the current context of increasing financial integration. We add to this ever-growing literature a new, simple and parsimonious testing procedure for volatility transmission. Our test focuses on extreme (large) values of the latent process of integrated volatility since they are of utmost concern for policy makers due to their sudden and destabilizing e ffects. The test statistic is based on realized measures of volatility, and we show that it is asymptotically distribution-free, and thus robust to jumps in the log-price process and microstructure noise. Extensive Monte Carlo simulations show that the test has good small sample size and power properties. An empirical application on the volatility of US and EU equity markets is further proposed.