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A Markov Regime Switching Approach towards Assessing Resilience of Romanian Collective Investment Undertakings

Author

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  • Leonardo Badea

    () (Department of Finances-Accountancy, Valahia University of Târgovişte, 2 Carol I Boulevard, Târgovişte 130024, Romania)

  • Daniel Ştefan Armeanu

    () (Department of Finance, The Bucharest University of Economic Studies, 6 Piata Romana, Bucharest 010374, Romania)

  • Iulian Panait

    () (Faculty of Economics, Hyperion University of Bucharest, 169 Calea Călăraşilor, Bucharest 030615, Romania)

  • Ştefan Cristian Gherghina

    () (Department of Finance, The Bucharest University of Economic Studies, 6 Piata Romana, Bucharest 010374, Romania)

Abstract

This paper explores the sensitivity of Romanian collective investment undertakings’ returns to changes in equity, fixed income and foreign exchange market returns. We use a sample of 80 open-end investment funds and pension funds with daily returns between 2016 and 2018. Our methodology consists of measuring changes in the daily conditional volatility for the fund returns (EGARCH) and changes in their conditional correlation with selected market risk factors (DCC MV-GARCH) throughout different volatility regimes identified using a Markov Regime Switching model. We argue that, on average, the level of conditional correlations between funds and market risk factors remained stable and unconcerned by the volatility regimes. In addition, for only less than half of the funds in the sample, their volatility regimes were synchronized with those of the selected market risk factors. We found that, on average, fund returns are more correlated with equity returns and less correlated with changes in local bond yields, while not being significantly influenced by changes in foreign bond yields or changes in foreign exchange. During the period investigated equity returns were the most volatile while the funds returns volatility were, on average, much more reduced. Overall, our results show the resilience of the Romanian collective investment sector to the selected market risk factors, during the investigated period.

Suggested Citation

  • Leonardo Badea & Daniel Ştefan Armeanu & Iulian Panait & Ştefan Cristian Gherghina, 2019. "A Markov Regime Switching Approach towards Assessing Resilience of Romanian Collective Investment Undertakings," Sustainability, MDPI, Open Access Journal, vol. 11(5), pages 1-24, March.
  • Handle: RePEc:gam:jsusta:v:11:y:2019:i:5:p:1325-:d:210534
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    More about this item

    Keywords

    Markov switching; conditional volatility; conditional correlation; market risk; investment and pension funds;
    All these keywords.

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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