The Factor–Spline–GARCH Model for High and Low Frequency Correlations

José Rangel and Robert Engle

Journal of Business & Economic Statistics, 2012, vol. 30, issue 1, 109-124

Abstract: We propose a new approach to model high and low frequency components of equity correlations. Our framework combines a factor asset pricing structure with other specifications capturing dynamic properties of volatilities and covariances between a single common factor and idiosyncratic returns. High frequency correlations mean revert to slowly varying functions that characterize long-term correlation patterns. We associate such term behavior with low frequency economic variables, including determinants of market and idiosyncratic volatilities. Flexibility in the time-varying level of mean reversion improves both the empirical fit of equity correlations in the United States and correlation forecasts at long horizons.

Date: 2012
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Citations: View citations in EconPapers (49)

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Related works:
Journal Article: The Factor--Spline--GARCH Model for High and Low Frequency Correlations (2011)
Working Paper: The Factor-Spline-GARCH Model for High and Low Frequency Correlations (2009)
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DOI: 10.1080/07350015.2012.643132

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