Regime Switches in the Volatility and Correlation of Financial Institutions
National Bank of Belgium Working Paper No. 227
54 Pages Posted: 13 Oct 2012
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Measuring and Testing the Impact of News on Volatility
By Robert F. Engle and Victor K. Ng
-
Caviar: Conditional Value at Risk by Quantile Regression
By Simone Manganelli and Robert F. Engle
-
Dynamic Conditional Correlation - a Simple Class of Multivariate GARCH Models
-
Dynamic Conditional Correlation a Simple Class of Multivariate GARCH Models
-
Dynamic Conditional Correlation - a Simple Class of Multivariate GARCH Models
-
Dynamic Conditional Correlation : A Simple Class of Multivariate GARCH Models
-
Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills
By Robert F. Engle, Victor Ng, ...
-
Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH
By Kevin Sheppard and Robert F. Engle
-
Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH
By Robert F. Engle and Kevin Sheppard
-
Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH
By Robert F. Engle and Kevin Sheppard