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Financial Spillovers Across Countries: Measuring shock transmissions.

Urbina, Jilber (2013): Financial Spillovers Across Countries: Measuring shock transmissions.

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Abstract

We measure volatility spread among countries and summarize it into a volatility spillover index to provide a measurement of such interdependence. Our spillover index is based on the forecast error variance decomposition (FEVD) for a VAR model at h-step ahead forecast, and we construct it using both the orthogonalized FEVD and the generalized FEVD (GFEVD); both of them provide similar results, but the generalized version is easier to handle when a data set with more than 6 variables is involved and non theory in available to impose the restrictions needed by the orthogonal version; this is true since the GFEVD does not depend on the restrictions imposed by the Choleski decomposition. This fact makes it attractive when economic theory does not fit well with variables relationship. An R package for reproducing this chapter estimations is entirely developed.

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