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Cross-country risk spillovers: A FHM factor copula approach

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  • Chang, Jing
  • Hao, Xiaozhen
  • Chen, Zhenlong

Abstract

To capture non-smooth changes in dynamic dependence, we incorporate a factorial hidden Markov regime-switching model within the factor Copula framework. This approach allows us to construct a factorial hidden Markov (FHM) factor Copula model that captures external shocks of varying magnitude, direction and short or long-term effect from significant events to multi-dimensional dependence. Additionally, given the favorable properties of RVaR and the cumulative effects of risk spillover, we propose the concept of multi-CoRVaR and present explicit calculation formulas derived from the constructed models. Finally, empirical analysis is conducted to study the cross-country risk spillovers in order to assess the risk faced by one country when other countries encounter extreme situations.

Suggested Citation

  • Chang, Jing & Hao, Xiaozhen & Chen, Zhenlong, 2025. "Cross-country risk spillovers: A FHM factor copula approach," Economic Modelling, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:ecmode:v:150:y:2025:i:c:s026499932500118x
    DOI: 10.1016/j.econmod.2025.107123
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