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Dynamic Conditional Correlations for Asymmetric Processes

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Author Info

  • Manabu Asai

    (Faculty of Economics, Soka University, Japan.)

  • Michael McAleer

    (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).)

Abstract

The paper develops two Dynamic Conditional Correlation (DCC) models, namely the Wishart DCC (wDCC) 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, asymmetric BEKK and alternative conventional DCC 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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File URL: http://eprints.ucm.es/13216/1/1130.pdf
File Function: revised augost 2011
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Bibliographic Info

Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 2011-30.

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Length: 26 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ucm:doicae:1130

Note: The authors wish to thank the editor and two referees for insightful comments and suggestions and Yoshi Baba for helpful discussions. For financial support, the first author acknowledges the Japan Society for the Promotion of Science and the Australian Academy of Science, and the second author wishes to acknowledge the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science.
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Related research

Keywords: Dynamic conditional correlations; Wishart process; EGARCH; GJR; asymmetric BEKK; heavy-tailed errors.;

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References

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