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Activity Number:
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130
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Type:
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Contributed
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Date/Time:
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Monday, August 3, 2009 : 8:30 AM to 10:20 AM
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Sponsor:
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Business and Economic Statistics Section
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| Abstract - #303908 |
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Title:
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Searching for the Perfect Storm: Regime Switching Correlations and Value at Risk
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Author(s):
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Lu Zhang*+
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Companies:
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Penn State University
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Address:
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325 Thomas Building, University Park, State College, PA, 16802,
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Keywords:
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Regime Switching ; Stochastic Volatility ; Reversible Jump MCMC ; Dynamic Correlation
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Abstract:
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We proposed a multivariate regime switching covariance model. In our model, covariances are decomposed into volatilities and correlations, both of which are driven by their respective regime processes. The regime processes are recovered by a reversible jump MCMC method. A shrinkage model for the off-diagonal elements of the correlation matrix is adopted which ensures the PSD of correlation matrices. Our model is of interests in tracking the relationship of regime switches in volatilities and correlations. It is useful in understanding financial risks associated with holding portfolios of assets, where they are very volatile and highly correlated. Simulation studies showed that our model can successfully recover correlations, volatilities and their hidden regime processes. We also present some empirical analysis using daily international equity market indices.
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- The address information is for the authors that have a + after their name.
- Authors who are presenting talks have a * after their name.
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