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Equities, Credits And Volatilities: A Multivariate Analysis Of The European Market During The Sub-Prime Crisis

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Executive Summary

Motivated by recent developments in light of the sub-prime and subsequent financial crisis the authors' fit two different Vector AutoRegressive Generalized Conditional Heteroscedastic (VAR-GARCH) models to three financial indices with the aim of understanding the development of dependency structures between credits spreads and other macroeconomic variables. They analysis includes daily quotes from June 2004 to April 2009 of the iTraxx Europe index, the Dow Jones Euro Stoxx 50 index, and the Dow Jones VStoxx index. They propose a robust, time-varying modeling approach concerning the conditional mean, and a BEKK versus DCC-GARCH approach concerning the conditional covariance.

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