Are correlations constant? Empirical and theoretical results on popular correlation models in finance
Roland Füss () and
Journal of Banking & Finance, 2017, vol. 84, issue C, 9-24
Multivariate GARCH models have been designed as an extension of their univariate counterparts. Such a view is appealing from a modeling perspective but imposes correlation dynamics that are similar to time-varying volatility. In this paper, we argue that correlations are quite different in nature. We demonstrate that the highly unstable and erratic behavior that is typically observed for the correlation among financial assets is to a large extent a statistical artifact. We provide evidence that spurious correlation dynamics occur in response to financial events that are sufficiently large to cause a structural break in the time-series of correlations. A measure for the autocovariance structure of conditional correlations allows us to formally demonstrate that the volatility and the persistence of daily correlations are not primarily driven by financial news but by the level of the underlying true correlation. Our results indicate that a rolling-window sample correlation is often a better choice for empirical applications in finance.
Keywords: Change-point tests; Correlation breaks; Dynamic conditional correlation (DCC); Multivariate GARCH models; Spurious conditional correlation (search for similar items in EconPapers)
JEL-codes: C12 C52 G01 G11 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Are Correlations Constant? Empirical and Theoretical Results on Popular Correlation Models in Finance (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:84:y:2017:i:c:p:9-24
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().