Regime switches in the volatility and correlation of financial institutions

   K. Boudt, K., J. Daníelsson, S. J. Koopman, and A. Lucas (2012, September). Regime switches in the volatility and correlation of financial institutions. Technical report, National Bank of Belgium. Working Paper Research no 227.

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We propose a parsimonious regime switching model to characterize the dynamics in the volatilities and correlations of US deposit banks stock returns over 1994-2011. A first innovative feature of the model is that the within-regime dynamics in the volatilities and correlation depend on the shape of the Student t innovations. Secondly, the across-regime dynamics in the transition probabilities of both volatilities and correlations are driven by macro-financial indicators such as the Saint Louis Financial Stability index, VIX or TED spread. We find strong evidence of time-variation in the regime switching probabilities and the within-regime volatility of most banks. The within-regime dynamics of the equicorrelation seem to be constant over the period.

@TECHREPORT{BoudtDanielssonKoopmanLucas2012,
 author =  {K. Boudt, K. and J{\'o}n Dan{\'\i}elsson and S. J.
                 Koopman  and Lucas, A.},
 title =   {Regime switches in the volatility and correlation of
                 financial institutions},
 year =    2012,
 note =    {Working Paper Research no 227},
 url =     {RiskResearch.org},
}