IDEAS home Printed from
   My bibliography  Save this article

On the Link between Volatilities, Regime Switching Probabilities and Correlation Dynamics


  • Jean-David Fermanian
  • Hassan Malongo


When markets are stressed, volatilities and correlations tend to increase jointly, and volatilities often react quicker than correlations. Based on this intuition, we extend the Dynamic Conditional Correlation model (Engle, 2002) in order to check whether the individual volatilities and/or the probabilities that some assets belong to a high/low volatility regime influence their correlation dynamics. We evaluate potential asymmetrical leverage effects too. We apply our methodology to MSCI Developed Markets indexes that cover twenty-three countries. The new models provide better in-sample fits and forecasts of the portfolio return distributions. Therefore, they are valuable frameworks for portfolio allocation and financial risk management.

Suggested Citation

  • Jean-David Fermanian & Hassan Malongo, 2018. "On the Link between Volatilities, Regime Switching Probabilities and Correlation Dynamics," Annals of Economics and Statistics, GENES, issue 131, pages 1-24.
  • Handle: RePEc:adr:anecst:y:2018:i:131:p:1-24
    DOI: 10.15609/annaeconstat2009.131.0001

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item

    More about this item


    Dynamic Correlations; Multivariate GARCH Models; Regime-Switching; Volatility Regimes.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adr:anecst:y:2018:i:131:p:1-24. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Secretariat General or Laurent Linnemer (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.