Predicting volatility and correlations with Financial Conditions Indexes

A. Opschoor, D. van Dijk, M. van der Wel

Research output: Contribution to JournalArticleAcademicpeer-review

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, inclusion of the FCI in volatility and correlation modeling improves Value-at-Risk estimates, particularly at short horizons.
Original languageEnglish
Pages (from-to)435-447
JournalJournal of Empirical Finance
Volume29
Issue number13-113/III
DOIs
Publication statusPublished - 2014

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