Multivariate Markov switching dynamic conditional correlation GARCH representations for contagion analysis

Billio, Monica; Caporin, Massimiliano

doi:10.1007/s10260-005-0108-8

Cited by 89 publications

(79 citation statements)

References 29 publications

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“…The dynamic conditional correlation (DCC) model used in the study follows [57][58][59] and more recently [60]. Let R t = [R s,t , R c,t ] be the (2 × 1) vector of returns where R s,t and R c,t are the return on SRI represented by a sustainability index and the return on conventional investment represented by a conventional market index, respectively.…”

Section: Methodsmentioning

confidence: 99%

“…In order to incorporate regime shifts into the DCC model shown in Equations (1) and (2), we follow [57] and introduce a Markov regime-switching dynamic correlation model by specifying Q t as…”

Section: Methodsmentioning

confidence: 99%

“…Note that the variances in this specification are regime-independent whereas the covariances (or correlations) are both time-varying and regime-switching (We estimate the MS-DCC-GARCH model using the two-step approach of [53,62]. In the second step, we use the modified Hamilton filter proposed by [57] to solve the path-dependence problem [63][64][65] and estimate the regime-switching conditional covariances accordingly). As [57] note, the specification in which all parameters are regime dependent is highly unstable due to the large number of switching parameters.…”

Section: Methodsmentioning

confidence: 99%

“…In the second step, we use the modified Hamilton filter proposed by [57] to solve the path-dependence problem [63][64][65] and estimate the regime-switching conditional covariances accordingly). As [57] note, the specification in which all parameters are regime dependent is highly unstable due to the large number of switching parameters. Therefore, we restrict the regime dependent structure to the time-varying correlations only.…”

Section: Methodsmentioning

confidence: 99%

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Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

2017

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This paper explores the potential diversification benefits of socially responsible investments for conventional stock portfolios by examining the risk spillovers and dynamic correlations between conventional and sustainability stock indexes from a number of regions. We observe significant unidirectional volatility transmissions from conventional to sustainable equities, suggesting that the criteria applied for socially responsible investments do not necessarily shield these securities from common market shocks. While significant dynamic correlations are observed between sustainable and conventional stocks, particularly in Europe, the analysis of both in-and out-of-sample dynamic portfolios suggests that supplementing conventional stock portfolios with sustainable counterparts improves the risk/return profile of stock portfolios in all regions. The findings overall suggest that sustainable investments can indeed provide diversification gains for conventional stock portfolios globally.

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Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

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Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

2017

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“…A few Markov-switching models have been proposed, like Billio and Caporin (2005), Pelletier (2006) and Haas and Mittnik (2008). The advantage of the Regime Switching for Dynamic Correlations (RSDC) model of Pelletier (2006) lies in offering a Markov-Switching structure for the correlation process by imposing constant correlations within each regime but switch from one regime to another via a Markov chain of order one, at the same time as making it possible to estimate with large datasets.…”

Section: Methodsmentioning

confidence: 99%

Commodity returns co-movements: Fundamentals or “style” effect?

Charlot

Darné

2016

Journal of International Money and Finance

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This paper investigates dynamic correlations both across commodities and between commodities and traditional assets, such as equities and government bonds, using the Regime Switching Dynamic Correlation (RSDC) model. In particular, this paper assesses the dynamics of 32 daily commodity futures returns, spanning a period from May 28, 2003, to June 04, 2014, in the light of economic and financial events before and after the mid-2007 financial crisis. There are three major findings. First, prior to the financial crisis, we detect stronger correlation among the wide range of commodities used in the analysis, indicating that the financialization process started impacting commodity price movements from mid-2005. Between commodities taken as an asset class and traditional asset classes our results generally show very weak commodity-equity and commodity-bond correlations prior to the Lehman Brother collapse. This can be explained by the "style "effect theory that correlations between different asset classes in a portfolio weaken. Second, during the financial crisis, correlations both across commodities and between commodities and equities increase dramatically, with a regime change which coincides exactly with the demise of Lehman Brothers on September 15, 2008. This suggests that a strong commodity-equity integration was temporarily masked by the "style "effect. However, commodity-bond correlations switch to a strongly negative regime, showing that government bonds were considered as refuge securities. Third and most importantly, the new and original finding here is the temporary nature of the financial crisis effect identified, as correlations both across commodities and between commodities and traditional assets revert to pre-crisis level from April 2013. This highlights the impact of the financial-based factors on commodity price movements.

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Markov Switching Constant Conditional Correlation GARCH Models for Hedging on Gold and Crude Oil

Chakpitak

Rakpho

Yamaka

2018

Structural Changes and Their Econometric Modeling

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Multivariate Markov switching dynamic conditional correlation GARCH representations for contagion analysis

Cited by 89 publications

References 29 publications

Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

Commodity returns co-movements: Fundamentals or “style” effect?

Markov Switching Constant Conditional Correlation GARCH Models for Hedging on Gold and Crude Oil

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