TY - JOUR
T1 - Predicting volatility and correlations with Financial Conditions Indexes
AU - Opschoor, A.
AU - van Dijk, D.
AU - van der Wel, M.
PY - 2014
Y1 - 2014
N2 - 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, inclusion of the FCI in volatility and correlation modeling improves Value-at-Risk estimates, particularly at short horizons.
AB - 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, inclusion of the FCI in volatility and correlation modeling improves Value-at-Risk estimates, particularly at short horizons.
U2 - 10.1016/j.jempfin.2014.10.003
DO - 10.1016/j.jempfin.2014.10.003
M3 - Article
VL - 29
SP - 435
EP - 447
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
SN - 0927-5398
IS - 13-113/III
ER -
