The Adjustment of the Yule-Walker Relations in VAR Modelling: The Impact of the Euro on the Hong Kong Stock Market

Abstract

VAR models are increasingly being used in the analysis of relationships between financial markets. In such models, there are circumstances that require zero entries in the coefficient matrices. Such circumstances can be particularly relevant in the context of emerging markets given their characteristics. We show that a direct extension of the use of the Yule-Walker relations for fitting VAR models with zero-non-zero patterned coefficient matrices is inconsistent with statistical procedures as the resultant estimated variance-covariance matrix of the white noise process becomes non-symmetric. This inconsistency has biased consequences for financial theory. The paper provides a theoretically consistent adjustment which fits with theory. The paper applies the procedure to a vector system comprising variables from the Hong Kong stock market and foreign exchange markets. The results indicate that the euro exchange rate contains leading information for the other components in the system. Show more