Volatility impulse response analysis for DCC‐GARCH models: The role of volatility transmission mechanisms

This study introduces volatility impulse response functions (VIRF) for DCC-GARCH models. In addition, the implications with respect to network analysis – using the connectedness approach of Diebold and Yılmaz (2014) – is discussed. The main advantages of this framework are (i) that the time-varying dynamics do not underlie a rolling-window approach and (ii) that it allows to test whether the propagation mechanism is time-varying or not. An empirical analysis on the volatility transmission mechanism across foreign exchange rate returns is illustrated. The results point out that the CHF and the EUR are net transmitters of shocks whereas the GBP and the JPY are net volatility receivers of shocks. Finally, the findings suggest a high degree of co-movement across Eu- ropean currencies which has important portfolio and risk management implications.