Regime switches in the volatility and correlation of financial institutions

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   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.

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 =     {ssrn.com/abstract=2160835},
 }


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