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Volatility Threshold Dynamic Conditional Correlations: An International Analysis

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Author Info

  • Maria Kasch
  • Massimiliano Caporin

Abstract

This article 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 article represents a useful tool for the study of market contagion. Copyright The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbs028
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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 11 (2013)
Issue (Month): 4 (September)
Pages: 706-742

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Handle: RePEc:oup:jfinec:v:11:y:2013:i:4:p:706-742

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References

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  1. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
  2. Y.K. Tse & Albert K.C. Tsui, 2000. "A Multivariate GARCH Model with Time-Varying Correlations," Econometrics 0004007, EconWPA.
  3. Sanjiv Ranjan Das & Raman Uppal, 2004. "Systemic Risk and International Portfolio Choice," Journal of Finance, American Finance Association, vol. 59(6), pages 2809-2834, December.
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  5. Sebastian Edwards & Raul Susmel, 2001. "Volatility Dependence and Contagion in Emerging Equity Markets," NBER Working Papers 8506, National Bureau of Economic Research, Inc.
  6. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
  7. Geert Bekaert & Campbell R. Harvey, 2003. "Market Integration and Contagion," NBER Working Papers 9510, National Bureau of Economic Research, Inc.
  8. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-44.
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  10. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen, 2003. "Multivariate GARCH models: a survey," CORE Discussion Papers 2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  17. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 0204, European Central Bank.
  18. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-38.
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Citations

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Cited by:
  1. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About the Dynamic Conditional Correlation Representation," Working Papers in Economics 13/21, University of Canterbury, Department of Economics and Finance.
  2. Jean-David Fermanian & Hassan Malongo, 2013. "On the Stationarity of Dynamic Conditional Correlation Models," Working Papers 2013-26, Centre de Recherche en Economie et Statistique.
  3. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About DCC," Working Papers in Economics 13/16, University of Canterbury, Department of Economics and Finance.
  4. Jean-David Fermanian & Hassan Malongo, 2014. "On the stationarity of Dynamic Conditional Correlation models," Papers 1405.6905, arXiv.org.
  5. Joshua C.C. Chan & Cody Yu-Ling Hsiao & Renée A. Fry-McKibbin, 2013. "A Regime Switching Skew-normal Model for Measuring Financial Crisis and Contagion," CAMA Working Papers 2013-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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