Modeling conditional correlations of asset returns: A smooth transition approach

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  • Annastiina Silvennoinen, Queensland University of Technology, Australien
  • 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.
OriginalsprogEngelsk
TidsskriftEconometric Reviews
Vol/bind34
Nummer1-2
Sider (fra-til)174-197
Antal sider25
ISSN0747-4938
DOI
StatusUdgivet - 2015

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