Modeling Volatility of Sector Indexes with Mul-tivariate GARCH Model

Abstract

The volatility spillover effect has always been an at-tractive issue for financial market participants. This research aimsto investigate volatility spillover between two major sector indexes, namely BIST Financial and BIST Services of Borsa Is-tanbul by using a multivariate GARCH model. Granger causali-ty and Hong’s causality tests were used to determining causal relation between them.Examining two major sector indexes from January 4, 2010, to July 24, 2018, the findings indicated that there wasvolatility spillover BIST Financial and BIST Ser-vices sector indexes. As for causality analyses, the volatility spillover between two sector indexes indicated bivariate causal relation in accordance with both the results of the Granger cau-sality and Hong’s causality tests. The findings are of great im-portance for market participants and investors to make proper-ly asset allocation and optimal portfolio management.