Regime Switches in the Volatility and Correlation of Financial Institutions

National Bank of Belgium Working Paper No. 227

54 Pages Posted: 13 Oct 2012

See all articles by Kris Boudt

Kris Boudt

Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Jon Danielsson

London School of Economics - Systemic Risk Centre

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Andre Lucas

VU Amsterdam - School of Business and Economics; Tinbergen Institute

Date Written: September 3, 2012

Abstract

We propose a parsimonious regime switching model to characterize the dynamics in the volatilities and correlations of US deposit banks' stock returns over 1994-2011. A first innovative feature of the model is that the within-regime dynamics in the volatilities and correlation depend on the shape of the Student t innovations. Secondly, the across-regime dynamics in the transition probabilities of both volatilities and correlations are driven by macro-financial indicators such as the Saint Louis Financial Stability index, VIX or TED spread. We find strong evidence of time-variation in the regime switching probabilities and the within-regime volatility of most banks. The within-regime dynamics of the equicorrelation seem to be constant over the period.

Suggested Citation

Boudt, Kris and Danielsson, Jon and Koopman, Siem Jan and Lucas, Andre, Regime Switches in the Volatility and Correlation of Financial Institutions (September 3, 2012). National Bank of Belgium Working Paper No. 227. Available at SSRN: https://ssrn.com/abstract=2160835 or http://dx.doi.org/10.2139/ssrn.2160835

Kris Boudt (Contact Author)

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Jon Danielsson

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44.207.955.6056 (Phone)

HOME PAGE: http://www.riskreasearch.org

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Andre Lucas

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

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