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Modelling time-varying correlations of financial markets

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Author Info
A.S.K. Wong
P.J.G. Vlaar

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Abstract

In this report we examine time-varying correlations of asset returns using the Dynamic Conditional Correlation (DCC) models, recently proposed by Engle (2002), that are estimated by a two-step procedure. First, we conclude that correlations vary considerably over time. Secondly, the conditional correlations exhibit significantly asymmetric effects for positive and negative asset return shocks. These asymmetric effects differ between stocks and bonds however. Thirdly, the loss of efficiency by using the two-step procedure is relatively large for the standard DCC model, but this procedure reduces the computational burden for the extended specifications. Finally, we compared the standard DCC model to other multivariate GARCH models. The DCC model seems to outperform the alternatives.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 739.

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Length: 36 pages
Date of creation: Sep 2003
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Handle: RePEc:dnb:wormem:739

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Related research
Keywords: International financial markets; Correlation;

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
F30 - International Economics - - International Finance - - - General

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bank for International Settlements, 2008. "Assessing the integration of Asia's equity and bond markets," BIS Papers chapters, in: Bank for International Settlements (ed.), Regional financial integration in Asia: present and future, volume 42, pages 1-37 Bank for International Settlements. [Downloadable!]
  2. Christos Savva & Denise R Osborn & Len Gill, 2005. "Volatility, spillover Effects and Correlations in US and Major European Markets," Money Macro and Finance (MMF) Research Group Conference 2005 23, Money Macro and Finance Research Group. [Downloadable!]
  3. C S Savva & D R Osborn & L Gill, 2005. "Spillovers and Correlations between US and Major European Stock Markets: The Role of the Euro," Centre for Growth and Business Cycle Research Discussion Paper Series 64, Economics, The Univeristy of Manchester. [Downloadable!]
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