Regime switches in the volatility and correlation of financial institutions

Kris Boudt, Jon Danielsson, Siem Jan Koopman and Andre Lucas

No 227, Working Paper Research from National Bank of Belgium

Abstract: 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.

Pages: 54 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-ets and nep-rmg
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201210-227

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