Dynamic Conditional Correlations for Asymmetric Processes
AbstractThe paper develops two Dynamic Conditional Correlation (DCC) models, namely the Wishart DCC (WDCC) model and the Matrix-Exponential Conditional Correlation (MECC) model. The paper applies the WDCC approach to the exponential GARCH (EGARCH) and GJR models to propose asymmetric DCC models. We use the standardized multivariate t-distribution to accommodate heavy-tailed errors. The paper presents an empirical example using the trivariate data of the Nikkei 225, Hang Seng and Straits Times Indices for estimating and forecasting the WDCC-EGARCH and WDCC-GJR models, and compares the performance with the asymmetric BEKK model. The empirical results show that AIC and BIC favour the WDCC-EGARCH model to the WDCC-GJR and asymmetric BEKK models. Moreover, the empirical results indicate that the WDCC-EGARCH-t model produces reasonable VaR threshold forecasts, which are very close to the nominal 1% to 3% values.
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Bibliographic InfoPaper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2010-76.
Date of creation: 22 Dec 2010
Date of revision:
EGARCH; GJR; asymmetric BEKK; dynamic conditional correlations; heavy-tailed errors; matrix exponential model; wishart process;
Other versions of this item:
- Manabu Asai & Michael McAleer, 2009. "Dynamic Conditional Correlations for Asymmetric Processes," CIRJE F-Series CIRJE-F-657, CIRJE, Faculty of Economics, University of Tokyo.
- Manabu Asai & Michael McAleer, 2009. "Dynamic Conditional Correlations for Asymmetric Processes," CARF F-Series CARF-F-168, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Manabu Asai & Michael McAleer, 2010. "Dynamic Conditional Correlations for Asymmetric Processes," KIER Working Papers 747, Kyoto University, Institute of Economic Research.
- Manabu Asai & Michael McAleer, 2011. "Dynamic Conditional Correlations for Asymmetric Processes," Documentos de Trabajo del ICAE 2011-30, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
- Manabu Asai & Michael McAleer, 2010. "Dynamic Conditional Correlations for Asymmetric Processes," Working Papers in Economics 10/76, University of Canterbury, Department of Economics and Finance.
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