Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83780
Authors: 
Rangel, Jose Gonzalo
Engle, Robert F.
Year of Publication: 
2009
Series/Report no.: 
Working Papers, Banco de México 2009-03
Abstract: 
We propose a new approach to model high and low frequency components of equity correlations. Our framework combines a factor asset pricing structure with other specifications capturing dynamic properties of volatilities and covariances between a single common factor and idiosyncratic returns. High frequency correlations mean revert to slowly varying functions that characterize long-term correlation patterns. We associate such term behavior with low frequency economic variables, including determinants of market and idiosyncratic volatilities. Flexibility in the time varying level of mean reversion improves the empirical fit of equity correlations in the US and correlation forecasts at long horizons.
Subjects: 
Factor models
Low frequency volatilities and correlations
Dynamic conditional correlation
Spline-GARCH
Idiosyncratic volatility
Long-term correlation forecasts
JEL: 
C22
C32
C51
C53
G11
G12
G32
Document Type: 
Working Paper
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