Financial Econometrics Case Study

Financial econometrics is one of the most important field for conducting an analysis of the financial theory and empirical finance. This field integrates the knowledge of finance, economics, mathematics and statistics. The topics applied in financial econometrics are risk management, volatility estimation, estimation and inferences of financial models and theory, hedging strategies, a term structure model, portfolio analysis and financial simulation

According to the risk and return in the stock market, it is particularly important for practitioners such as global investors, speculators, financial analysts, financial institutions and governments to master in an event where there are unforeseen and unknown circumstances that are beyond control.

For simplicity, the traditional GARCH model assumed that the Gaussian innovations can be improved upon to the GARCH models with different types of innovation. Subsequently, Bollerslev (1990) and Engle (2002) improved the GARCH models into the pattern of multivariate random series and estimated the conditional linear dependence of volatility with multivariate normality, namely the constant conditional correlation and Dynamic conditional correlation multivariate GARCH respectively. In the area of financial application, many studies applied CCC GARCH and DCC GARCH to learn about the topics that were related to international diversification, Lee et al. (2006), Chiang et al(2007), Syllignakis et al.(2011), Ayusuk (2012) and Hwang et al. (2013). However, the weakness of this approach is that they employed GARCH with the Gaussian assumption, which is not necessary true for studying about financial data. Meanwhile, the GARCH models can be used to forecast the volatility and can be used to simulate the portfolio selection. Moreover, the GARCH models can also be used to calculate the value at risk and expected shortfall for further risk management

Many researches on topics related to international diversification, including Cavaglia et al. (2002), Li (2003), Fletcher and Marshall (2005), Chiou (2009) and Herrero and Vzquez (2013) recommend that international diversification improves portfolio performance. Additionally, many researches have just realized the importance of developing countries' stock markets and especially Asian markets. Wang (2014) suggested that East Asian markets are less responsive to the shocks in the USA after the global financial crisis. Jayasuriya (2011) found evidence that the stock market behavior of China had an impact on the stock market behavior of East Asia and the Pacific. Zhou et al. (2012) found that the impact of the Chinese stock market on Asian markets had become increasingly powerful after 2005. Glick and Hutchison (2013) also found that the strength of the correlation of stock markets between China and other Asian countries have increased markedly during 2008-2010 and has remained high in 2010-2012. Moreover, in 2015 the ASEAN Economic Community (AEC) will induce regional economic integration, which provides a competitive advantage and some economic