Modeling conditional correlations of asset returns : a smooth transition approach

Silvennoinen, Annastiina & Terasvirta, Timo (2015) Modeling conditional correlations of asset returns : a smooth transition approach. Econometric Reviews, 34(1-2), pp. 174-197.

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Abstract

In this paper we propose a new multivariate GARCH model with time-varying conditional correlation structure. The time-varying conditional correlations change smoothly between two extreme states of constant correlations according to a predetermined or exogenous transition variable. An LM–test is derived to test the constancy of correlations and LM- and Wald tests to test the hypothesis of partially constant correlations. Analytical expressions for the test statistics and the required derivatives are provided to make computations feasible. An empirical example based on daily return series of five frequently traded stocks in the S&P 500 stock index completes the paper.

Impact and interest:

7 citations in Scopus
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3 citations in Web of Science®

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ID Code: 78598
Item Type: Journal Article
Refereed: Yes
Additional Information: Special Issue: Econometrics with Theory: A Special Issue Honoring William A. Barnett
Keywords: Constant conditional correlation, Dynamic conditional correlation, Multivariate GARCH, Return comovement, Variable correlation GARCH model, Volatility model evaluation, C12, C32, C51, C52, G1
DOI: 10.1080/07474938.2014.945336
ISSN: 1532-4168
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2014 Taylor & Francis Group, LLC
Deposited On: 12 Nov 2014 00:06
Last Modified: 13 Nov 2014 04:02

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