Structural Changes in Asset Correlations And  Macroeconomic Fundamentals

40 Pages Posted: 22 Jun 2023

See all articles by Malvina Marchese

Malvina Marchese

Cass Business School, City, University of london

Francesca Di Iorio

CSEF - University of Naples Federico II

Michael Tamvakis

City University London - The Business School

Ioannis Kyriakou

affiliation not provided to SSRN

Abstract

This article proposes a novel approach to modelling structural changes in asset returns correlations and their relationship to macroeconomic fundamentals. We introduce a new correlation component model, the Regime-switching DCC-MIDAS, that incorporates breaks of different type in the conditional and unconditional correlations. Breaks in the secular component are associated with low-frequency macroeconomic fundamentals via a Smooth Transition mixed-data sampling regression, while short-run correlations are characterized by abrupt regime switches linked to market constraints. Following a discussion of estimation, inference and simulation-based evaluations, the model is applied to the prediction of future energy returns. The results indicate that the Regime-switching DCC-MIDAS is a very useful specification especially in periods of intense market instability, such as the recent pandemic crisis.

Keywords: Mixed frequency datastructural breakscorrelation component modelsrisk managementValue at RiskEnergy Markets financialization

Suggested Citation

Marchese, Malvina and Di Iorio, Francesca and Tamvakis, Michael and Kyriakou, Ioannis, Structural Changes in Asset Correlations And  Macroeconomic Fundamentals. Available at SSRN: https://ssrn.com/abstract=4488060 or http://dx.doi.org/10.2139/ssrn.4488060

Malvina Marchese (Contact Author)

Cass Business School, City, University of london ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Francesca Di Iorio

CSEF - University of Naples Federico II ( email )

via L. Rodinò 22
Naples, Naples 80138
Italy

Michael Tamvakis

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Ioannis Kyriakou

affiliation not provided to SSRN

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