Abstract

The aim of this paper is to assess the dynamic interdependence among Stock, Bond and Money market of Australia. The proposed diagonal BEKK (DBEKK) model allows for market interaction which provides useful information for pricing securities, measuring value-at-risk (VaR), asset allocation and diversification and, assisting financial regulators for policy implementation. The purpose of this paper is to examine the return and volatility spillovers for Stock, Bond and Money markets. Historical data on Stock, Bond, and T-bill of Australia’s domestic financial markets from 4 April 2006 to 20 June 2016, for a total 883 observations are analyzed. The DBEKK model is estimated by QMLE. The DBEKK model is used as it is the only multivariate conditional volatility model with well-established regularity conditions and known asymptotic properties [1] . Application of the model to Australia’s domestic Stock, Bond, and Money markets reveals that the domestic financial markets are interdependent and volatility is predictable. Empirical findings suggest return and volatility spillovers from Bond and Money markets to Stock market, Tbill to Bond, and Bond to Tbill. Further the negative spillovers were detected utilizing partial co-volatility in the DBEKK model. The empirical findings of this paper quantifies the association among the security markets which can be utilized for improving agents’ decision-making strategies for risk management, portfolio selection and diversification. Based on these results, dynamic hedging strategies could be suggested to analyze market fluctuations in the financial markets.

Keywords

Diagonal BEKK, QMLE, Diversification, Spillovers, Partial Co-Volatility, Bond Market, Stock Market, Money Market