Abstract

This paper employs a multivariate generalized autoregressive conditional heteroscedasticity dynamic conditional correlation (GARCH-DCC) model to simultaneously estimate the mean and conditional variance of Brazilian financial and consumer sectors using daily returns from January 2, 2008 to September 30, 2010 of the indexes that represent these sectors.  Since different financial assets are traded based on these sector indexes, it is important for financial market participants to understand the volatility transmission mechanism over time and across sectors in order to make optimal portfolio allocation decisions. We find significant bilateral transmission of volatility between the sectors. These findings support the idea of cross-market hedging and sharing of common information by investors in these sectors in Brazil.

Key words: Volatility spillover, dynamic conditional correlation, sector indexes, Brazilian market.