Four Australian Banks and the Multivariate Time-Varying Smooth Transition Correlation GARCH model

Anthony Hall, Annastiina Silvennoinen () and Timo Teräsvirta
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Annastiina Silvennoinen: NCER, Queensland University of Technology

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper looks at changes in the correlations of daily returns between the four major banks in Australia. Revelations from the analysis are of importance to investors, but also to government involvement, due to the large proportion of the highly concentrated financial sector relying on the stability of the Big Four. For this purpose, a methodology for building Multivariate Time-Varying STCC-GARCH models is developed. The novel contributions in this area are the specification tests related to the correlation component, the extension of the general model to allow for additional correlation regimes, and a detailed exposition of the systematic, improved modelling cycle required for such nonlinear models. There is an R-package that includes the steps in the modelling cycle. Simulations evidence the robustness of the recommended model building approach. The empirical analysis reveals an increase in correlations of the Australia's four largest banks that coincides with the stagnation of the home loan market, technology changes, the mining boom, and Basel II alignment, increasing the exposure of the Australian financial sector to shocks.

Keywords: Unconditional correlation; modelling volatility; modelling correlations; multivariate autoregressive conditional heteroskedasticity (search for similar items in EconPapers)
JEL-codes: C32 C52 C58 (search for similar items in EconPapers)
Pages: 45
Date: 2021-09-28
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2021-13

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