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The Use of Range-based Volatility Estimators in Testing for Granger Causality in Risk on International Capital Markets

This study utilizes the extreme value theory (EVT) approach to compare the performance of a wide variety of range-based volatility estimators in the analysis of causality in risk between emerging and developed markets. The AR(1)-GARCH(1, 1) model with t -distribution is used as a benchmark. Regulator and firm loss functions are used to select the best volatility model. Two tests of causality in risk are used in our empirical study. The AR-GARCH model with EVT outperforms the other approaches in the case of huge risk. Among the most likely risk-taking markets are Standard &amp; Poor’s 500, CAC 40, Nikkei 225, Nasdaq and FTSE 100.