Nonlinearities and Regimes in Conditional Correlations with Different Dynamics

TitleNonlinearities and Regimes in Conditional Correlations with Different Dynamics
Publication TypeWorking Paper
Year of Publication2018
AuthorsL. Bauwens, E. Otrando
Number2018_03
Keywordsdynamic conditional correlations, Hadamard exponential matrix, regime-switching dynamic correlations
Abstract

New parameterizations of the dynamic conditional correlation (DCC) model and of the regime-switching dynamic correlation (RSDC) model are introduced, such that these models provide a specific dynamics for each correlation. They imply a non-linear autoregressive form of dependence on lagged correlations and are based on properties of the Hadamard exponential matrix. The new models are applied to a data set of twenty stock market indices, comparing them to the classical DCC and RSDC models. The empirical results show that the new models improve their classical versions in terms of several criteria.

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