Regime Switching for Dynamic Correlations

Denis Pelletier

No 230, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: We propose a new model for the variance between multiple time series, the Regime Switching Dynamic Correlation. We decompose the covariances into correlations and standard deviations and the correlation matrix follow a regime switching model; it is constant within a regime but different across regimes. The transitions between the regimes are governed by a Markov chain. This model does not suffer from a curse of dimensionality and it allows analytic computation of multi-step ahead conditional expectations of the variance matrix. We also present an empirical application which illustrates that our model can have a better in-sample fit of the data than the Dynamic Conditional Correlation model proposed by Engle(JBES, 2002)

Keywords: dynamic correlation; regime switching; markov chain; ARMACH (search for similar items in EconPapers)
JEL-codes: C32 C53 G0 G1 (search for similar items in EconPapers)
Date: 2004-08-11
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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Journal Article: Regime switching for dynamic correlations (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:230

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