The Factor--Spline--GARCH Model for High and Low Frequency Correlations
Jose Rangel () and
Journal of Business & Economic Statistics, 2011, vol. 30, issue 1, 109-124
We propose a new approach to model high and low frequency components of equity correlations. Our framework combines a factor asset pricing structure with other specifications capturing dynamic properties of volatilities and covariances between a single common factor and idiosyncratic returns. High frequency correlations mean revert to slowly varying functions that characterize long-term correlation patterns. We associate such term behavior with low frequency economic variables, including determinants of market and idiosyncratic volatilities. Flexibility in the time-varying level of mean reversion improves both the empirical fit of equity correlations in the United States and correlation forecasts at long horizons.
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Working Paper: The Factor-Spline-GARCH Model for High and Low Frequency Correlations (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:30:y:2011:i:1:p:109-124
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