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Volatility Threshold Dynamic Conditional Correlations: An International Analysis

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Author Info
Maria Kasch () (University of Bonn)
Massimiliano Caporin () (Università di Padova)

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Abstract

We extend the Dynamic Conditional Correlation multivariate GARCH specification to investigate the dynamic contemporaneous relationship between correlations and variances of the underlying assets. We present a generalization of the DCC model where the dynamic behavior depends on the assets variances through a threshold structure. Our purpose is to analyze the behavior of correlations in periods of high volatility. The application of the proposed specification to a sample of markets heterogeneous in the levels of their development allows the identification of market pairs whose correlations show low sensitivity to high underlying volatility.

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Publisher Info
Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0065.

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Length: 52 pages
Date of creation: 2008
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Handle: RePEc:pad:wpaper:0065

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Related research
Keywords: dynamic correlations; thresholds; volatility thresholds; spillovers;

Find related papers by JEL classification:
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. BAUWENS, Luc & LAURENT, SŽbastien & ROMBOUTS, Jeroen, 2003. "Multivariate GARCH models: a survey," CORE Discussion Papers 2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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  2. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December. [Downloadable!] (restricted)
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  3. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 817-44.
  4. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 5-33. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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  6. Monica Billio & Massimiliano Caporin & Michele Gobbo, 2006. "Flexible Dynamic Conditional Correlation multivariate GARCH models for asset allocation," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(2), pages 123-130, March. [Downloadable!] (restricted)
  7. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Oxford University Press, vol. 4(4), pages 537-572. [Downloadable!] (restricted)
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  8. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany. [Downloadable!]
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  9. Karolyi, G Andrew & Stulz, Rene M, 1996. " Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-86, July. [Downloadable!] (restricted)
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  10. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September. [Downloadable!] (restricted)
  11. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February. [Downloadable!]
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  12. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  13. Edwards, Sebastian & Susmel, Raul, 2001. "Volatility dependence and contagion in emerging equity markets," Journal of Development Economics, Elsevier, vol. 66(2), pages 505-532, December. [Downloadable!] (restricted)
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  14. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473. [Downloadable!] (restricted)
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  15. Rabemananjara, R & Zakoian, J M, 1993. "Threshold Arch Models and Asymmetries in Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 31-49, Jan.-Marc. [Downloadable!] (restricted)
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  17. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(1), pages 1-42.
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  18. Hafner, C.M. & Franses, Ph.H.B.F., 2003. "A generalized dynamic conditional correlation model for many asset returns," Econometric Institute Report EI 2003-18 Revision_Date:, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
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