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Structural Conditional Correlation

Enzo Weber

Journal of Financial Econometrics, 2010, vol. 8, issue 3, 392-407

Abstract: A small strand of recent literature is occupied with identifying simultaneity in multiple equation systems through autoregressive conditional heteroscedasticity. Since this approach assumes that the structural innovations are uncorrelated, any contemporaneous connection of the endogenous variables needs to be exclusively explained by mutual spillover effects. In contrast, this paper allows for instantaneous covariances, which become identifiable by imposing the constraint of structural constant/dynamic conditional correlation (SCCC/SDCC). In this, common driving forces can be modeled in addition to simultaneous transmission effects. The methodology is applied to the Dow Jones and Nasdaq Composite indexes, illuminating scope and functioning of the new models. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oupjournals.org, Oxford University Press.

Date: 2010
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