Advanced Search
MyIDEAS: Login to save this paper or follow this series

Modeling the Dependence of Conditional Correlations on Volatility

Contents:

Author Info

  • L. Bauwens
  • E. Otranto

    ()

Abstract

Several models have been developed to capture the dynamics of the conditional correlations between time series of financial returns, but few studies have investigated the determinants of the correlation dynamics. A common opinion is that the market volatility is a major determinant of the correlations. We extend some models to capture explicitly the dependence of the correlations on the volatility of the market of interest. The models differ in the way by which the volatility influences the correlations, which can be transmitted through linear or nonlinear, and direct or indirect effects. They are applied to different data sets to verify the presence and possible regularity of the volatility impact on correlations.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://crenos.unica.it/crenos/node/4527
Download Restriction: no

File URL: http://crenos.unica.it/crenos/sites/all/modules/pubdlcnt/pubdlcnt.php?file=http://crenos.unica.it/crenos/sites/default/files/WP13-04.pdf&nid=4527
Download Restriction: no

Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201304.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:cns:cnscwp:201304

Contact details of provider:
Postal: Via S. Giorgio 12, I-09124 Cagliari
Phone: +70/6756406
Fax: +70/6756402
Email:
Web page: http://www.crenos.unica.it/
More information through EDIRC

Related research

Keywords: volatility effects; conditional correlation; dcc; markov switching;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Luc, BAUWENS & Arie, PREMINGER & Jeroen, ROMBOUTS, 2007. "Theory and inference for a Markov switching GARCH model," Discussion Papers (ECON - Département des Sciences Economiques), Université catholique de Louvain, Département des Sciences Economiques 2007033, Université catholique de Louvain, Département des Sciences Economiques.
  2. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 5(4), pages 397-416, October.
  3. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 299-308, July.
  4. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 213-237.
  5. Bayoumi, Tamim & Fazio, Giorgio & Kumar, Manmohan & MacDonald, Ronald, 2007. "Fatal attraction: Using distance to measure contagion in good times as well as bad," Review of Financial Economics, Elsevier, Elsevier, vol. 16(3), pages 259-273.
  6. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(1), pages 3-26, February.
  7. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 39-70.
  8. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  9. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 64(1-2), pages 307-333.
  10. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  11. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 649-676, 04.
  12. Annastiina Silvennoinen & Timo Teräsvirta, 2012. "Modelling conditional correlations of asset returns: A smooth transition approach," CREATES Research Papers 2012-09, School of Economics and Management, University of Aarhus.
  13. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 445-473.
  14. Edoardo Otranto, 2005. "The multi-chain Markov switching model," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(7), pages 523-537.
  15. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1779-1801, December.
  16. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
  17. Colacito, Riccardo & Engle, Robert F. & Ghysels, Eric, 2011. "A component model for dynamic correlations," Journal of Econometrics, Elsevier, Elsevier, vol. 164(1), pages 45-59, September.
  18. Adam Clements & Mark Doolan & Stan Hurn & Ralf Becker, 2009. "Evaluating multivariate volatility forecasts," NCER Working Paper Series, National Centre for Econometric Research 41, National Centre for Econometric Research, revised 25 Nov 2009.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. MANIQUET, François & MORELLI, Massimo & ,, 2013. "Approval quorums dominate participation quorums," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2013054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. GABSZEWICZ, Jean & ZANAJ, Skerdilajda & ,, 2013. "(Un)stable vertical collusive agreements," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2013053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Jean-David Fermanian & Hassan Malongo, 2013. "On the Stationarity of Dynamic Conditional Correlation Models," Working Papers, Centre de Recherche en Economie et Statistique 2013-26, Centre de Recherche en Economie et Statistique.
  4. MAULEON, Ana & MOLIS, Elena & VANNETELBOSCH, Vincent & VERGOTE , Wouter, 2013. "Dominance invariant one-to-one matching problems," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2013052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. NESTEROV, Yurii, 2013. "Universal gradient methods for convex optimization problems," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2013026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. CORNUEJOLS, Gérard & WOLSEY, Laurence & YILDIZ, Sercan, 2013. "Sufficiency of cut-generating functions," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2013027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. E. Otranto & M. Mucciardi & P. Bertuccelli, 2014. "Spatial Effects in Dynamic Conditional Correlations," Working Paper CRENoS 201406, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  8. Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cns:cnscwp:201304. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antonello Pau).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.