Modeling dependence structure in size-sorted portfolios: A Structural Multivariate GARCH Model

A new model is developed that augments a structural VAR specification with a GARCH covariance matrix. The model is utilised to study time series dependencies between three size-sorted portfolios from the Australian Stock Exchange. Even after accounting for contemporaneous correlations the returns on small and medium firm portfolios are found to lag the large firm portfolio returns. An asymmetric lag structure is also found in the structural variance equations. The evidence is consistent with the Lo and MacKinlay (1990) lead-lag effect and the volatility spill-over hypothesis of Condrad, Gultekin and Kaul (1991).