Dynamic conditional angular correlation

Riad Jarjour and Kung-Sik Chan

Journal of Econometrics, 2020, vol. 216, issue 1, 137-150

Abstract: We introduce the concept of angular correlation for estimating the instantaneous correlation matrix with a single multivariate realization. The proposed estimator is generally a positive definite correlation matrix and robust in that for bivariate normal data, the sample angular correlation is equally likely to be above or below the population correlation coefficient. We then generalize the dynamic conditional correlation (DCC) model to the dynamic conditional angular correlation (DCAC) model. We demonstrate the efficacy and robustness of the proposed methods against leptokurticity, with some numerical experiments. In particular, a real application illustrates the better performance of the DCAC model than the DCC model in portfolio construction.

Keywords: Instantaneous correlation matrix; Portfolio construction; Positive definiteness; Robustness; Volatility (search for similar items in EconPapers)
JEL-codes: C51 C59 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:216:y:2020:i:1:p:137-150

DOI: 10.1016/j.jeconom.2020.01.010

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