Testing against changing correlation

Andrew Harvey and Stephen Thiele

Journal of Empirical Finance, 2016, vol. 38, issue PB, 575-589

Abstract: A test for time-varying correlation is developed within the framework of a dynamic conditional score (DCS) model for both Gaussian and Student t-distributions. The test may be interpreted as a Lagrange multiplier test and modified to allow for the estimation of models for time-varying volatility in the individual series. Unlike standard moment-based tests, the score-based test statistic includes information on the level of correlation under the null hypothesis and local power arguments indicate the benefits of doing so. A simulation study shows that the performance of the score-based test is strong relative to existing tests across a range of data generating processes. An application to the Hong Kong and South Korean equity markets shows that the new test reveals changes in correlation that are not detected by the standard moment-based test.

Keywords: Dynamic conditional score; EGARCH; Lagrange multiplier test; Portmanteau test; Time-varying covariance matrices (search for similar items in EconPapers)
JEL-codes: C12 C32 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Testing against Changing Correlation (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:38:y:2016:i:pb:p:575-589

DOI: 10.1016/j.jempfin.2015.09.003

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