Volatility spillovers and price interdependencies; a dynamic non parametric approach

This paper investigates the volatility spillovers of four major equity markets using a new approach namely, the Filtered Historical Simulation approach (FHS). The FHS captures very effectively the changes and interactions in the first and second moments. A dynamic system based on Filtered Historical Simulation (FHS) and nonparametric regression is used to obtain estimates of the variance-covariance of the set of standardised residuals. This system is then used to examine dependencies in covariance changes and to carry an impulse response analysis to investigate the dynamic responses to volatility shocks.