IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v22y2002i12p1119-1146.html
   My bibliography  Save this article

Excessive variation in risk‐factor correlations and volatilities

Author

Listed:
  • Turan G. Bali
  • Hans Genberg
  • Salih N. Neftci

Abstract

This article explores the time‐series behavior of correlations of returns, volatilities of returns, volatilities of volatilities, and correlations of volatilities in domestic and international financial markets such as equity (indices), interest rates (bonds), and currency (exchange rates) using a Kalman filter approach to estimate the aforementioned parameters. The main findings include the following. First, the correlations of risk factors are highly unstable over time, both in terms of sign and absolute value. Second, the time variation of risk‐factor volatilities is stochastically nonlinear. Long periods of deterministic volatilities are interrupted by sudden bursts of highly volatile periods. Third, daily volatilities of risk‐factor volatilities fluctuate over time within a narrower band. Fourth, the correlations between volatilities are generally positive and relatively stable over time. These results have implications for financial risk management, dynamic asset allocation, and valuation of derivative securities. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1119–1146, 2002

Suggested Citation

  • Turan G. Bali & Hans Genberg & Salih N. Neftci, 2002. "Excessive variation in risk‐factor correlations and volatilities," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(12), pages 1119-1146, December.
    • Handle: RePEc:wly:jfutmk:v:22:y:2002:i:12:p:1119-1146
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fengler, Matthias R. & Schwendner, Peter, 2003. "Correlation Risk Premia for Multi-Asset Equity Options," SFB 373 Discussion Papers 2003,10, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.

    More about this item

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F2 - International Economics - - International Factor Movements and International Business
    • G0 - Financial Economics - - General

    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:wly:jfutmk:v:22:y:2002:i:12:p:1119-1146. 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: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    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.