IDEAS home Printed from https://ideas.repec.org/a/prf/journl/v7y2013i1p6-30.html
   My bibliography  Save this article

Can we Improve Understanding of the Financial Market Dependencies in the Crisis by their Decomposition?

Author

Listed:
  • Jozef Barunik

    () (Institute of Information Theory and Automation/Academy of Sciences of the Czech Republic)

Abstract

Study of the financial market dependencies have become one of the most active and successful areas of research in the time series econometrics and economic forecasting during the recent decades. Current financial crisis have shown that understanding of the dependencies in the markets is crucial and it has even boosted the interest of researchers. This work brings new theoretical framework for the realized covariation estimation generalizing the current knowledge and bringing the estimation to the time-frequency domain for the first time. Usage of wavelets allows us to decompose the correlation measures into several investment horizons. Our estimator is moreover able to separate individual jumps, co-jumps and true covariation from the high frequency data, thus brings better understanding of the dependence. The results have crucial impact on the portfolio diversification especially in the crisis years as they point to the strong dynamic relationships at various investment horizons. Results suggest that understanding jumps and co-jumps is important for forecasting the covariance and the correlation as they have large impact on these measures. Our results have significant economic value as wrong assumption about the dependence process will have direct impact on the forecasting and portfolio valuation.

Suggested Citation

  • Jozef Barunik, 2013. "Can we Improve Understanding of the Financial Market Dependencies in the Crisis by their Decomposition?," ACTA VSFS, University of Finance and Administration, vol. 7(1), pages 6-30.
  • Handle: RePEc:prf:journl:v:7:y:2013:i:1:p:6-30
    as

    Download full text from publisher

    File URL: http://www.vsfs.cz/periodika/acta-2013-01.pdf
    Download Restriction: no

    More about this item

    Keywords

    correlation; multivariate realized volatility; covariation; jumps; co-jumping; wavelets;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    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:prf:journl:v:7:y:2013:i:1:p:6-30. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Hakenova). General contact details of provider: http://edirc.repec.org/data/vsfspcz.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.