Dynamic Conditional Correlations for Asymmetric Processes

Manabu Asai and Michael McAleer

No 2011-30, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: The paper develops two Dynamic Conditional Correlation (DCC) models, namely the Wishart DCC (wDCC) model. The paper applies the wDCC approach to the exponential GARCH (EGARCH) and GJR models to propose asymmetric DCC models. We use the standardized multivariate t-distribution to accommodate heavy-tailed errors. The paper presents an empirical example using the trivariate data of the Nikkei 225, Hang Seng and Straits Times Indices for estimating and forecasting the wDCC-EGARCH and wDCC-GJR models, and compares the performance with the asymmetric BEKK model. The empirical results show that AIC and BIC favour the wDCC-EGARCH model to the wDCC-GJR, asymmetric BEKK and alternative conventional DCC models. Moreover, the empirical results indicate that the wDCC-EGARCH-t model produces reasonable VaR threshold forecasts, which are very close to the nominal 1% to 3% values.

Keywords: Dynamic conditional correlations; Wishart process; EGARCH; GJR; asymmetric BEKK; heavy-tailed errors. (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011
Note: The authors wish to thank the editor and two referees for insightful comments and suggestions and Yoshi Baba for helpful discussions. For financial support, the first author acknowledges the Japan Society for the Promotion of Science and the Australian Academy of Science, and the second author wishes to acknowledge the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science.
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https://eprints.ucm.es/id/eprint/13216/1/1130.pdf revised augost 2011 (application/pdf)

Related works:
Working Paper: Dynamic Conditional Correlations for Asymmetric Processes (2010)
Working Paper: Dynamic Conditional Correlations for Asymmetric Processes (2010)
Working Paper: Dynamic Conditional Correlations for Asymmetric Processes (2010)
Working Paper: Dynamic Conditional Correlations for Asymmetric Processes (2009)
Working Paper: Dynamic Conditional Correlations for Asymmetric Processes (2009)
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