Exceedance Correlation Tests for Financial Returns

Yi-Ting Chen

Journal of Financial Econometrics, 2016, vol. 14, issue 3, 581-616

Abstract: It has become popular to explore the static conditional correlation structure of financial returns by using the exceedance correlations or similar measures. In this article, we propose a generalized test which is applicable to checking various conditional correlation structures in a model-free context, and apply a newly developed method to establishing a simple test for evaluating the adequacy of a model in explaining the conditional correlations. We demonstrate that our tests can generate useful alternatives to existing exceedance correlation tests, and provide a simulation study and an empirical example to show the validity and applicability of our tests.

Date: 2016
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