Abstract
In this article we propose a two step procedure for modeling the propagation of financial shocks. The first step consists in the estimation, by means of SWARCH models, of the conditional probability of being in a period of high volatility, while in the second step such indicators are included in a structural simultaneous equations models for interdependences among different countries. The results show that episodes of financial crisis effectively happened during periods of high volatility and that such measures of instability are important in explaining the propagation of devaluation expectations between six European Countries during the ERM period.
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Notes
Higgs and Worthington (2004) is an interesting application to the transmission of volatility among eight major art markets.
In this part of the analysis, we prefer concentrating on the growth rate of the series, in order to avoid non-stationarity, which in fact con not be rejected with the standard unit root tests.
A weak signal of the presence of structural breaks can be found for the Italian spread around the end of the sample. The null hypothesis, however, cannot be rejected at the 1% significant level.
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Bacchiocchi, E., Bevilacqua, M. International crises, instability periods and contagion: the case of the ERM. Int Rev Econ 56, 105–122 (2009). https://doi.org/10.1007/s12232-009-0064-y
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DOI: https://doi.org/10.1007/s12232-009-0064-y