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Modeling the Dependence of Conditional Correlations on Volatility

  • L. Bauwens
  • E. Otranto

    ()

Several models have been developed to capture the dynamics of the conditional correlations between time series of financial returns, but few studies have investigated the determinants of the correlation dynamics. A common opinion is that the market volatility is a major determinant of the correlations. We extend some models to capture explicitly the dependence of the correlations on the volatility of the market of interest. The models differ in the way by which the volatility influences the correlations, which can be transmitted through linear or nonlinear, and direct or indirect effects. They are applied to different data sets to verify the presence and possible regularity of the volatility impact on correlations.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201304.

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Date of creation: 2013
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Handle: RePEc:cns:cnscwp:201304
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