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The variance implied conditional correlation

Author

Listed:
  • Andres Algaba
  • Kris Boudt
  • Steven Vanduffel

Abstract

We apply univariate GARCH models to construct a computationally simple filter for estimating the conditional correlation matrix of asset returns. The proposed Variance Implied Conditional Correlation (VICC) exploits the polarization result that links the correlation between two standardized variables with the variances of linear combinations thereof. In a Monte Carlo study, we show that the VICC yields accurate correlation estimates for common choices of the correlation dynamics. We also provide an empirical application to cross hedging that confirms the effectiveness of the VICC.

Suggested Citation

  • Andres Algaba & Kris Boudt & Steven Vanduffel, 2019. "The variance implied conditional correlation," ULB Institutional Repository 2013/290161, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/290161
    Note: SCOPUS: ar.j
    as

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