Correlation impulse response functions

Hafner, Christian;Herwartz, Helmut
(2023) Finance Research Letters — Vol. 57, p. 104176 (2023)

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Abstract
Volatility impulse response functions are a widely used tool for analyzing the temporal impact of shocks on (co-)volatilities of financial time series. This paper proposes an extension to correlation impulse response functions (CIRF), based on a multivariate GARCH modeling framework. As we show, CIRF and corresponding covariance impulse response functions can react quite differently to a given shock and even move in opposite directions. Due to the inherent nonlinearity, no analytical form is available for CIRF, but we propose a straightforward algorithm to estimate the CIRF numerically. In an empirical application we focus on the change of the consensus protocol of Ethereum in 2022 and its effect on the correlation with Bitcoin.
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Hafner, C., & Herwartz, H. (2023). Correlation impulse response functions. Finance Research Letters, 57, 104176. https://doi.org/10.1016/j.frl.2023.104176 (Original work published 2023)