Modelling 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 ve frequently traded stocks in the S&P 500 stock index completes the paper.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider33
StatusUdgivet - 2012

    Forskningsområder

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

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