IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Excessive Variation in Risk Factor Correlation and Volatilities

Listed author(s):
  • Salih Neftci

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

(This abstract was borrowed from another version of this item.)

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2002 with number 254.

in new window

Date of creation: 01 Jul 2002
Handle: RePEc:sce:scecf2:254
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecf2:254. 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: (Christopher F. Baum)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.