The paper considers the problem of volatility co-movement, namely as to whether
two financial returns have perfectly correlated common volatility process, in the
framework of multivariate stochastic volatility models and proposes a test which
checks the volatility co-movement. The proposed test is a stochastic volatility version
of the co-movement test proposed by Engle and Susmel (1993), who investigated
whether international equity markets have volatility co-movement using the
framework of the ARCH model.
In empirical analysis we found that volatility co-movement exists among closelylinked
stock markets and that volatility co-movement of the exchange rate markets
tends to be found when the overall volatility level is low, which is contrasting to the
often-cited finding in the financial contagion literature that financial returns have
co-movement in the level during the financial crisis
