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Dynamic Conditional Correlations and Risk Spread between International Financial Markets: A DCC-Garch Analysis

Author

Listed:
  • Bogdan DIMA

    (West University of Timisoara, Faculty of Economics and Business Administration, Timisoara, Romania;)

  • Lucian Liviu ALBU

    (Institute for Economic Forecasting, Romanian Academy,)

  • Ştefana Maria DIMA

    (West University of Timisoara, Faculty of Economics and Business Administration; East European Center for Research in Economics and Business (ECREB), Timisoara, Romania; Institute of Advanced Environmental Research, West University of Timișoara. Corresponding author)

  • Roxana IOAN

    (West University of Timisoara, Faculty of Economics and Business Administration, Timisoara, Romania;)

  • Anca SARAOLU IONAŞCUŢI

    (West University of Timisoara, Doctoral School of Economics and Business Administration, Timisoara,)

  • Marian Ilie SIMINICA

    (University of Craiova.)

Abstract

The paper studies the dynamic conditional correlations (DCC Multivariate GARCH models) of risks for 31 major financial markets, using Expected Shortfall as proxies for these markets' risk. We selected several specifications of the Generalized Orthogonal GARCH model and of the Copula Asymmetric Generalized DCC model. Most of the GARCH-Copula models outperform standard DCC-GARCH and GO-GARCH models. We further study the nature of the processes driving these correlation series, finding the correlations non-stationary (but not ‘explosive’) and exhibiting multifractal properties. Moreover, some DCCs may act as triggers (at least in a ‘nonlinear’ Granger sense) for others. Finally, we show evidence of cross-market risk spread during the 2007-2010 turmoil, pandemic and Ukrainian war crises.

Suggested Citation

  • Bogdan DIMA & Lucian Liviu ALBU & Ştefana Maria DIMA & Roxana IOAN & Anca SARAOLU IONAŞCUŢI & Marian Ilie SIMINICA, 2025. "Dynamic Conditional Correlations and Risk Spread between International Financial Markets: A DCC-Garch Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-22, April.
    • Handle: RePEc:rjr:romjef:v::y:2025:i:1:p:5-22
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    More about this item

    Keywords

    GO-GARCH DCC; Copula-GARCH DCC; multivariate affine Normal-Inverse Gaussian distribution; Expected Shortfall; financial crises;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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