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Measuring rank correlation coefficients between financial time series: A GARCH-copula based sequence alignment algorithm

Yih-Wenn Laih

European Journal of Operational Research, 2014, vol. 232, issue 2, 375-382

Abstract: This paper presents a novel four-stage algorithm for the measurement of the rank correlation coefficients between pairwise financial time series. In first stage returns of financial time series are fitted as skewed-t distributions by the generalized autoregressive conditional heteroscedasticity model. In the second stage, the joint probability density function (PDF) of the fitted skewed-t distributions is computed using the symmetrized Joe–Clayton copula. The joint PDF is then utilized as the scoring scheme for pairwise sequence alignment in the third stage. After solving the optimal sequence alignment problem using the dynamic programming method, we obtain the aligned pairs of the series. Finally, we compute the rank correlation coefficients of the aligned pairs in the fourth stage. To the best of our knowledge, the proposed algorithm is the first to use a sequence alignment technique to pair numerical financial time series directly, without initially transforming numerical values into symbols. Using practical financial data, the experiments illustrate the method and demonstrate the advantages of the proposed algorithm.

Keywords: Time series; Rank correlation; GARCH; Copula; Sequence alignment (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:232:y:2014:i:2:p:375-382

DOI: 10.1016/j.ejor.2013.07.028

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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