# A Bayesian non-parametric approach to asymmetric dynamic conditional correlation model with application to portfolio selection

*Audronė Virbickaitė*,
*M. Concepción Ausín* and
*Pedro Galeano*

*Computational Statistics & Data Analysis*, 2016, vol. 100, issue C, 814-829

**Abstract:**
A Bayesian non-parametric approach for modeling the distribution of multiple returns is proposed. More specifically, an asymmetric dynamic conditional correlation (ADCC) model is considered to estimate the time-varying correlations of financial returns where the individual volatilities are driven by GJR-GARCH models. This composite model takes into consideration the asymmetries in individual assets’ volatilities, as well as in the correlations. The errors are modeled using a Dirichlet location–scale mixture of multivariate Normals allowing for a flexible return distribution in terms of skewness and kurtosis. This gives rise to a Bayesian non-parametric ADCC (BNP-ADCC) model, as opposed to a symmetric specification, called BNP-DCC. Then these two models are compared using a sample of Apple Inc. and NASDAQ Industrial index daily returns. The obtained results reveal that for this particular data set the BNP-ADCC outperforms the BNP-DCC model. Finally, an illustrative asset allocation exercise is presented.

**Keywords:** Bayesian analysis; Dirichlet process mixtures; DCC; Markov chain Monte Carlo; Multivariate GARCH; Portfolio allocation (search for similar items in EconPapers)

**Date:** 2016

**References:** View references in EconPapers View complete reference list from CitEc

**Citations** View citations in EconPapers (1) Track citations by RSS feed

**Downloads:** (external link)

http://www.sciencedirect.com/science/article/pii/S0167947314003430

Full text for ScienceDirect subscribers only.

**Related works:**

Working Paper: A Bayesian Non-Parametric Approach to Asymmetric Dynamic Conditional Correlation Model With Application to Portfolio Selection (2014)

Working Paper: A Bayesian non-parametric approach to asymmetric dynamic conditional correlation model with application to portfolio selection (2013)

This item may be available elsewhere in EconPapers: Search for items with the same title.

**Export reference:** BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text

**Persistent link:** http://EconPapers.repec.org/RePEc:eee:csdana:v:100:y:2016:i:c:p:814-829

Access Statistics for this article

Computational Statistics & Data Analysis is currently edited by *S.P. Azen*

More articles in Computational Statistics & Data Analysis from Elsevier

Series data maintained by Dana Niculescu ().