Department of Economics and Business Economics

Timo Teräsvirta

Modeling conditional correlations of asset returns: A smooth transition approach

Research output: Research - peer-reviewJournal article

  • Annastiina Silvennoinen
    Annastiina SilvennoinenQueensland University of TechnologyAustralia
  • Timo Teräsvirta
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.
Original languageEnglish
JournalEconometric Reviews
Volume34
Issue number1-2
Pages (from-to)174-197
Number of pages25
ISSN0747-4938
DOIs
StatePublished - 2015

Bibliographical note

Campus adgang til artiklen / Campus access to the article

    Research areas

  • Constant conditional correlation, Dynamic conditional correlation, Multivariate GARCH, Return comovement, Variable correlation GARCH model, Volatility model evaluation

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