Forecasting correlations during the late-2000s financial crisis: The short-run component, the long-run component, and structural breaks

Francesco Audrino

Computational Statistics & Data Analysis, 2014, vol. 76, issue C, 43-60

Abstract: The predictive power of recently introduced components affecting correlations is investigated. The focus is on models allowing for a flexible specification of the short-run component of correlations as well as the long-run component. Moreover, models allowing the correlation dynamics to be subjected to regime-shift caused by threshold-based structural breaks of a different nature are also considered. The results indicate that in some cases there may be a superimposition of the long-term and short-term movements in correlations. Therefore, care is called for in interpretations when estimating the two components. Testing the forecasting accuracy of correlations during the late-2000s financial crisis yields mixed results. In general, component models allowing for a richer correlation specification possess an increased predictive accuracy. Economically speaking, no relevant gains are found by allowing for more flexibility in the correlation dynamics.

Keywords: Correlation forecasting; Component models; Threshold regime-switching models; Mixed data sampling; Performance evaluation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:csdana:v:76:y:2014:i:c:p:43-60

DOI: 10.1016/j.csda.2013.06.002

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