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Are Correlations Constant Over Time? Application of the CC-TRIGt-test to Return Series from Different Asset Classes

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  • Matthias Fischer

Abstract

A new test for constant correlation is proposed. Based on the bivariate Student-t distribution, this test is derived as Lagrange multiplier (LM) test. Whereas most of the traditional tests (e.g. Jennrich, 1970, Tang, 1995 and Goetzmann, Li & Rouwenhorst, 2005) specify the unknown correlations as piecewise constant, our model-setup for the correlation coefficient is based on trigonometric functions. Applying this test to assets from different financial markets (stocks, exchange rates, metals) there is empirical evidence that many of the correlations vary over time.

Suggested Citation

  • Matthias Fischer, 2007. "Are Correlations Constant Over Time? Application of the CC-TRIGt-test to Return Series from Different Asset Classes," SFB 649 Discussion Papers SFB649DP2007-012, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2007-012
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    References listed on IDEAS

    as
    1. S. Kullback, 1967. "On Testing Correlation Matrices," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 16(1), pages 80-85, March.
    2. Kaplanis, Evi C., 1988. "Stability and forecasting of the comovement measures of international stock market returns," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 63-75, March.
    3. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
    4. Kjersti Aas & Ingrid Hobaek Haff, 2006. "The Generalized Hyperbolic Skew Student's t-Distribution," Journal of Financial Econometrics, Oxford University Press, vol. 4(2), pages 275-309.
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    More about this item

    Keywords

    Lagrange multiplier test; constant correlation; trigonometric functions.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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