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Modelling conditional correlations of asset returns: A smooth transition approach

  • Annastiina Silvennoinen

    ()

    (School of Economics and Finance)

  • Timo Teräsvirta

    ()

    (Aarhus University, School of Economics and Management and CREATES)

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.

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File URL: ftp://ftp.econ.au.dk/creates/rp/12/rp12_09.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-09.

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Length: 34
Date of creation: 02 2012
Date of revision:
Handle: RePEc:aah:create:2012-09
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Robert-Paul Berben & W. Jos Jansen, 2003. "Comovement in international equity markets: A sectoral view," Finance 0310001, EconWPA.
  2. Annastiina Silvennoinen & Timo Teräsvirta, 2008. "Multivariate GARCH models," CREATES Research Papers 2008-06, School of Economics and Management, University of Aarhus.
  3. Mika Meitz & Pentti Saikkonen, 2008. "Parameter estimation in nonlinear AR-GARCH models," Economics Series Working Papers 396, University of Oxford, Department of Economics.
  4. Susan Thorp & George Milunovich, 2007. "Symmetric Versus Asymmetric Conditional Covariance Forecasts: Does It Pay To Switch?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(3), pages 355-377.
  5. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(02), pages 280-310, April.
  6. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
  7. Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
  8. repec:cor:louvrp:-1847 is not listed on IDEAS
  9. Tse, Y. K., 2000. "A test for constant correlations in a multivariate GARCH model," Journal of Econometrics, Elsevier, vol. 98(1), pages 107-127, September.
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