Identifying Financial Time Series with Similar Dynamic Conditional Correlation
|Title||Identifying Financial Time Series with Similar Dynamic Conditional Correlation|
|Publication Type||Working Paper|
|Year of Publication||2008|
|Keywords||clustering, dcc, distance, multivariate garch, wald test|
One of the main problems in modelling multivariate conditional covariance time series is the parameterization of the correlation structure because, if no constraints are imposed, it implies a large number of unknown coefficients. The most popular models propose parsimonious representations, imposing similar correlation structures to all the series or to groups of time series, but the choice of these groups is quite subjective. In this paper we propose a statistical approach to detect groups of homogeneous time series in terms of correlation dynamics. The approach is based on a clustering algorithm, which uses the idea of distance between dynamic conditional correlations, and the classical Wald test to compare the coefficients of two groups of dynamic conditional correlations. The proposed approach is evaluated in terms of simulation experiments and applied to a set of financial time series.