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Modeling multivariate autoregressive conditional heteroskedasticity with the double smooth transition conditional correlation GARCH Model

Silvennoinen, Annastiina & Terasvirta, Timo (2009) Modeling multivariate autoregressive conditional heteroskedasticity with the double smooth transition conditional correlation GARCH Model. Journal of Financial Econometrics, 7(4), pp. 373-411.

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Abstract

In this paper, we propose a multivariate GARCH model with a time-varying conditional correlation structure. The new double smooth transition conditional correlation (DSTCC) GARCH model extends the smooth transition conditional correlation (STCC) GARCH model of Silvennoinen and Teräsvirta (2005) by including another variable according to which the correlations change smoothly between states of constant correlations. A Lagrange multiplier test is derived to test the constancy of correlations against the DSTCC-GARCH model, and another one to test for another transition in the STCC-GARCH framework. In addition, other specification tests, with the aim of aiding the model building procedure, are considered. Analytical expressions for the test statistics and the required derivatives are provided. Applying the model to the stock and bond futures data, we discover that the correlation pattern between them has dramatically changed around the turn of the century. The model is also applied to a selection of world stock indices, and we find evidence for an increasing degree of integration in the capital markets.

Impact and interest:

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14 citations in Web of Science®

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ID Code: 32310
Item Type: Journal Article
Additional URLs:
Keywords: Consistent Conditional Correlation, Dynamic Conditional Correlation, Multivariate GARCH, Return Comovement, Volatility model
DOI: 10.1093/jjfinec/nbp013
ISSN: 1479-8409
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300) > Econometric and Statistical Methods (140302)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300) > Time-Series Analysis (140305)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2009 The Authors and Oxford University Press
Copyright Statement: © The Author 2009. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.
Deposited On: 24 May 2010 08:16
Last Modified: 29 Feb 2012 23:56

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