Modelling conditional correlations of asset returns: A smooth transition approach

Annastiina Silvennoinen and Timo Teräsvirta

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In this paper we propose a new multivariate GARCH model with time-varying conditional correlation structure. The time-varying conditional correlations change smoothly between two extreme states of constant correlations according to a predetermined or exogenous transition variable. An LM-test is derived to test the constancy of correlations and LM- and Wald tests to test the hypothesis of partially constant correlations. Analytical expressions for the test statistics and the required derivatives are provided to make computations feasible. An empirical example based on daily return series of five frequently traded stocks in the S&P 500 stock index completes the paper.

Keywords: GARCH; Constant conditional correlation; Dynamic conditional correlation; Return comovement; Variable correlation GARCH model; Volatility model evaluation (search for similar items in EconPapers)
JEL-codes: C12 C32 C51 C52 G1 (search for similar items in EconPapers)
Pages: 34
Date: 2012
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Modeling Conditional Correlations of Asset Returns: A Smooth Transition Approach (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2012-09

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