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Regime switches in the volatility and correlation of financial institutions

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  • Kris Boudt

    ()
    (KU Leuven
    Lessius
    V.U. University Amsterdam)

  • Jon Danielsson

    (London School of Economics)

  • Siem Jan Koopman

    (V.U. University Amsterdam
    Tinbergen Institute)

  • Andre Lucas

    (V.U. University Amsterdam
    Tinbergen Institute)

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.

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/wp227En.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 227.

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Length: 54 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:nbb:reswpp:201210-227

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