Cross-country risk spillovers: A FHM factor copula approach

Jing Chang, Xiaozhen Hao and Zhenlong Chen

Economic Modelling, 2025, vol. 150, issue C

Abstract: To capture non-smooth changes in dynamic dependence, we incorporate a factorial hidden Markov regime-switching model within the factor Copula framework. This approach allows us to construct a factorial hidden Markov (FHM) factor Copula model that captures external shocks of varying magnitude, direction and short or long-term effect from significant events to multi-dimensional dependence. Additionally, given the favorable properties of RVaR and the cumulative effects of risk spillover, we propose the concept of multi-CoRVaR and present explicit calculation formulas derived from the constructed models. Finally, empirical analysis is conducted to study the cross-country risk spillovers in order to assess the risk faced by one country when other countries encounter extreme situations.

Keywords: Factorial hidden markov model; Factor copula; Dynamic dependence; Risk spillover effect (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:150:y:2025:i:c:s026499932500118x

DOI: 10.1016/j.econmod.2025.107123

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