||During periods of market dislocation, which can be characterized by high asset volatility,
correlations between assets generally tend to increase. However, there has been little
research on the behavior of correlations between risk measures across securities markets.
The aim of our research is to examine correlation dynamics between alternative risk
measures rather than asset classes. Correlations between credit default swaps, equity
volatility skew, and at-the-money volatility were found to increase during the recent
period of market dislocation. To ascertain when the dislocation period began, we built
a regime shift model to estimate the date at which the dislocation began. We have
chosen to focus our analysis on risk measures for financial institutions in particular,
as this industry has been most severely affected by the current financial crisis.