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Forecasting correlations during the late-2000s financial crisis: short-run component, long-run component, and structural breaks

Francesco Audrino ()

No 1112, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: We empirically investigate the predictive power of the various components affecting correlations that have been recently introduced in the literature. We focus on models allowing for a flexible specification of the short-run component of correlations as well as the long-run component. Moreover, we also allow the correlation dynamics to be subjected to regime-shift caused by threshold-based structural breaks of a different nature. Our results indicate that in some cases there may be a superimposition of the long- and short-term movements in correlations. Therefore, care is called for in interpretations when estimating the two components. Testing the forecasting accuracy of correlations during the late-2000s financial crisis yields mixed results. In general component models allowing for a richer correlation specification possess a (marginally) increased predictive accuracy. Economically speaking, no relevant gains are found by allowing for more flexibility in the correlation dynamics.

Keywords: Correlation forecasting; Component models; Threshold regime-switching models; Mixed data sampling; Performance evaluation (search for similar items in EconPapers)
JEL-codes: C32 C52 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
Date: 2011-04
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