Predicting Volatility and Correlations with Financial Conditions Indexes
Journal of Empirical Finance, Vol. 29, 2014
Tinbergen Institute Discussion Paper 13-113/III
26 Pages Posted: 10 Aug 2013 Last revised: 17 Dec 2016
Date Written: August 1, 2014
Abstract
We model the impact of financial conditions on asset market volatilities and correlations. We extend the Spline-GARCH model for volatility and DCC model for correlation to allow for inclusion of indexes that measure financial conditions. In our empirical application we consider daily stock returns of US deposit banks during the period 1994-2011, and proxy financial conditions by the Bloomberg Financial Conditions Index (FCI) which comprises the money, bond, and equity markets. We find that worse financial conditions are associated with both higher volatility and higher correlations between stock returns, especially during crises. Moreover, including the FCI in volatility and correlation modeling improves Value-at-Risk estimates, particularly at short horizons.
Keywords: Dynamic correlations, Volatility modeling, Financial Conditions Indexes, Bank holding companies
JEL Classification: G17, G23, E44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Spline-Garch Model for Low Frequency Volatility and its Global Macroeconomic Causes
-
The Spline-Garch Model for Low Frequency Volatility and its Global Macroeconomic Causes
-
The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes
By Robert F. Engle and J. Gonzalo Rangel
-
On the Economic Sources of Stock Market Volatility
By Robert F. Engle, Eric Ghysels, ...
-
On the Economic Sources of Stock Market Volatility
By Robert F. Engle, Eric Ghysels, ...
-
A Component Model for Dynamic Correlations
By Ric Colacito, Robert F. Engle, ...
-
Macroeconomic Volatility and Stock Market Volatility, Worldwide
By Francis X. Diebold and Kamil Yilmaz
-
Macroeconomic Volatility and Stock Market Volatility, World-Wide
By Francis X. Diebold and Kamil Yilmaz
-
Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry
By Eric Ghysels, Alberto Plazzi, ...