Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/56262 
Year of Publication: 
2005
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance No. 577
Publisher: 
Stockholm School of Economics, The Economic Research Institute (EFI), Stockholm
Abstract: 
In this paper we propose a new multivariate GARCH model with time-varying conditional correlation structure. The approach adopted here is based on the decomposition of the covariances into correlations and standard deviations. The time-varying conditional correlations change smoothly between two extreme states of constant correlations according to an endogenous 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 Standard & Poor 500 stock index completes the paper. The model is estimated for the full five-dimensional system as well as several subsystems and the results discussed in detail.
Subjects: 
Multivariate GARCH
Constant conditional correlation
Dynamic conditional correlation
Return comovement
Volatility model evaluation
JEL: 
C12
C32
C51
C52
G10
Document Type: 
Working Paper

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