Dynamic partial correlation models

D’Innocenzo, Enzo and Andre Lucas

Journal of Econometrics, 2024, vol. 241, issue 2

Abstract: We introduce a new scalable model for dynamic conditional correlation matrices based on a recursion of dynamic bivariate partial correlation models. By exploiting the model’s recursive structure and the theory of perturbed stochastic recurrence equations, we establish stationarity, ergodicity, and filter invertibility in the multivariate setting using conditions for bivariate slices of the data only. From this, we establish consistency and asymptotic normality of the maximum likelihood estimator for the model’s static parameters. The new model outperforms benchmarks like the t-cDCC and the multivariate t-GAS, both in simulations and in an in-sample and out-of-sample asset pricing application to US stock returns.

Keywords: Dynamic correlations; Score-driven models; Stationarity; Filter invertibility (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:241:y:2024:i:2:s0304407624000939

DOI: 10.1016/j.jeconom.2024.105747

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