Regime switches in the volatility and correlation of financial institutions
AbstractWe 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.
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Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 227.
Length: 54 pages
Date of creation: Oct 2012
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-BAN-2012-10-20 (Banking)
- NEP-ECM-2012-10-20 (Econometrics)
- NEP-ETS-2012-10-20 (Econometric Time Series)
- NEP-RMG-2012-10-20 (Risk Management)
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