The persistence and asymmetry of time-varying correlations

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Dateien:
Aufrufstatistik

URI: http://nbn-resolving.de/urn:nbn:de:bsz:21-opus-19299
http://hdl.handle.net/10900/47396
Dokumentart: ResearchPaper
Date: 2002
Source: Tübinger Diskussionsbeiträge der Wirtschaftswissenschaftlichen Fakultät ; 232
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: GARCH-Prozess
Other Keywords:
Multivariate GARCH , BEKK , Covariance Models
License: Publishing license excluding print on demand
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Abstract:

Existing multivariate GARCH models either impose strong restrictions on the parameters or do not guarantee a well-defined (positive definite) covariance matrix. We focus on the multivariate GARCH model of Baba, Engle, Kraft and Kroner (BE=) and show that the covariance and correlation is not adequately specified. This implies that any analysis of the persistence and the asymmetry of the correlation is difficult and potentially biased. We illustrate this by the use of Monte-Carlo simulations for different correlation processes and propose a new Bivariate Dynamic Correlation (BDC) model that parameterizes the conditional correlation directly and eliminates the shortcomings of the BEKK model. Empirical results for correlations of the German stock market index with three international stock market indices reveal that correlations exhibit different degrees of persistence and different asymmetric reactions than variances. In addition, we find that correlations do not necessarily increase with variantes implying a justification for international portfolio diversification.

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