Volatility Threshold Dynamic Conditional Correlations: An International Analysis
University of Mannheim - Department of Finance
University of Padova - Department of Economics and Management "Marco Fanno"
April 2, 2012
Forthcoming, Journal of Financial Econometrics
This paper proposes a modeling framework for the study of changes in cross-market comovement conditional on volatility regimes. Methodologically, we extend the Dynamic Conditional Correlation multivariate GARCH model to allow the dynamics of correlations to depend on asset variances through a threshold structure. The empirical application of our model to a sample of international stock markets in 1994-2011 indicates that the periods of market turbulence are associated with an increase in cross-market comovement. The modeling framework proposed in the paper represents a useful tool for the study of market contagion.
Number of Pages in PDF File: 45
Keywords: Dynamic Correlations, Volatility Thresholds, Comovement, Contagion
JEL Classification: C50, F37, G11, G15Accepted Paper Series
Date posted: March 5, 2007 ; Last revised: October 29, 2012
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