A local dynamic conditional correlation model

Yuanhua Feng

MPRA Paper from University Library of Munich, Germany

Abstract: This paper introduces the idea that the variances or correlations in financial returns may all change conditionally and slowly over time. A multi-step local dynamic conditional correlation model is proposed for simultaneously modelling these components. In particular, the local and conditional correlations are jointly estimated by multivariate kernel regression. A multivariate k-NN method with variable bandwidths is developed to solve the curse of dimension problem. Asymptotic properties of the estimators are discussed in detail. Practical performance of the model is illustrated by applications to foreign exchange rates.

Keywords: Local and conditional correlations; multivariate nonparametric ARCH; multivariate kernel regression; multivariate k-NN method (search for similar items in EconPapers)
JEL-codes: C32 G0 G1 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1592

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