skip to content

Faculty of Economics

Journal Cover

Pesaran, B. and Pesaran M.H.

Conditional volatility and correlations of weekly returns and the VAR analysis of 2008 stock market crash

Economic Modelling

Vol. 27(6) pp. 1398–1416 (2010)

Abstract: Modelling of conditional volatilities and correlations across asset returns is an integral part of portfolio decision making and risk management. Over the past three decades there has been a trend towards increased asset return correlations across markets, a trend which has been accentuated during the recent financial crisis. We shall examine the nature of asset return correlations using weekly returns on futures markets and investigate the extent to which multivariate volatility models proposed in the literature can be used to formally characterize and quantify market risk. In particular, we ask how adequate these models are for modelling market risk at times of financial crisis. In doing so we consider a multivariate t version of the Gaussian dynamic conditional correlation (DCC) model proposed by Engle (2002), and show that the t-DCC model passes the usual diagnostic tests based on probability integral transforms, but fails the value at risk (VaR) based diagnostics when applied to the post 2007 period that includes the recent financial crisis.

JEL Codes: C51, C52, G11

Author links: M. Hashem Pesaran  

Publisher's Link:

Papers and Publications

Recent Publications

Huffman, D., Raymond, C. and Shvets, J. Persistent Overconfidence and Biased Memory: Evidence from Managers American Economic Review [2022]

Elliott, M., Golub, B. and Leduc, M. V. Supply Network Formation and Fragility American Economic Review [2022]

Colicev, A., Hoste, J. and Konings, J. The Impact of a Large Depreciation on the Cost of Living of Rich and Poor Consumers International Economic Review, accepted [2024]

Ajzenman, N., Cavalcanti, T. and Da Mata, D More than Words: Leaders' Speech and Risky Behavior During a Pandemic American Economic Journal: Economic Policy [2023]