A generalized Dynamic Conditional Correlation Model for Portfolio Risk Evaluation

Monica Billio () and Massimiliano Caporin ()

No 2006_53, Working Papers from University of Venice "Ca' Foscari", Department of Economics

Abstract: We propose a generalization of the Dynamic Conditional Correlation multivariate GARCH model of Engle (2002) and of the Asymmetric Dynamic Conditional Correlation model of Cappiello et al. (2006). The model we propose introduces a block structure in parameter matrices that allows for interdependence with a reduced number of parameters. Our model nests the Flexible Dynamic Conditional Correlation model of Billio et al. (2006) and is named Quadratic Flexible Dynamic Conditional Correlation Multivariate GARCH. In the paper, we provide conditions for positive definiteness of the conditional correlations. We also present an empirical application to the Italian stock market comparing alternative correlation models for portfolio risk evaluation.

Keywords: Dynamic correlations; Block-structures; Flexible correlation models (search for similar items in EconPapers)
JEL-codes: C51 C32 G18 (search for similar items in EconPapers)
Date: Written
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