The Dynamics of the S&P 500 under a Crisis Context: Insights from a Three-Regime Switching Model

Lorenzo Cerboni Baiardi, Massimo Costabile, Domenico De Giovanni, Fabio Lamantia, Arturo Leccadito, Ivar Massabó, Massimiliano Menzietti (), Marco Pirra, Emilio Russo and Alessandro Staino
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Lorenzo Cerboni Baiardi: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Massimo Costabile: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Domenico De Giovanni: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Fabio Lamantia: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Arturo Leccadito: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Ivar Massabó: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Marco Pirra: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Emilio Russo: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy
Alessandro Staino: Department of Economics, Statistics and Finance, University of Calabria, Ponte Bucci cubo 1C, 87036 Rende (CS), Italy

Risks, 2020, vol. 8, issue 3, 1-15

Abstract: This paper provides an econometric analysis aiming at evidencing the dynamics showed by the S&P 500 market index during the period of 4 January 2001–28 April 2020, in which the subprime crisis has taken place and the COVID-19 crisis has begun. In particular, we fit a three-regime switching model that allows market parameters to behave differently during economic downturns, with the regimes representative of the tranquil, volatile, and turbulent states. We document that the tranquil regime is the most frequent for the whole period, while the dominant regime is the volatile one for the crisis of 2008 and the turbulent one for the first four months of 2020. We fit the same model to the returns of the Dow Jones Industrial Average index and find that during the same period of investigation, the most frequent regime has been the tranquil one, while the volatile and turbulent regimes share the same frequencies. Additionally, we use a multinomial logit model to describe the probabilities of volatile or turbulent regimes. We show that, in the case of the S&P 500 index, the returns from the Volatility Index (VIX) index are significant for both the volatile and the turbulent regimes, while the gold, WTI oil, and the dollar indices have some explanatory power only for the turbulent regime.

Keywords: COVID-19; subprime; regime switching model; market risk; econometric analysis (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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