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| Author: | Christodoulakis, G. A. Satchell, S. E. |
| Title: | Correlated ARCH (CorrARCH): Modelling the time- varying conditional correlation between financial asset returns |
| Journal: | European Journal of Operational Research
2002 : JUN, VOL. 139:2, p. 351-370 |
| Index terms: | ANALYTICAL REVIEW MODELS MODEL TESTING STATISTICS |
| Language: | eng |
| Abstract: | Although the time variation of the conditional correlations of asset returns is a well established stylized fact (and of crucial importance for efficient financial decisions) there is no explicit general model available for its estimation and forecasting. In this paper, the authors propose a bivariate GARCH covariance structure in which conditional variances can follow any GARCH-type process while conditional correlation is generated by an explicit discrete-time stochastic process, the CorrARCH process. A high order CorrARCH can parsimoniously be presented by a CorGARCH process. The model successfully generates the reported stylized facts, establishes an autocorrelation structure for correlations and thus provides an explicit framework for out-of- sample forecasting. |
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