Item Type | Journal paper |
Abstract | Multivariate GARCH models have been designed as an extension of their univariate counterparts. Such a view is appealing from a modeling perspective but imposes correlation dynamics that are similar to time-varying volatility. In this paper, we argue that correlations are quite different in nature. We demonstrate that the highly unstable and erratic behavior that is typically observed for the correlation among financial assets is to a large extent a statistical artefact. We provide evidence that spurious correlation dynamics occur in response to financial events that are sufficiently large to cause a structural break in the time-series of correlations. A measure for the autocovariance structure of conditional correlations allows us to formally demonstrate that the volatility and the persistence of daily correlations are not primarily driven by financial news but by the level of the underlying true correlation. Our results indicate that a rolling-window sample correlation is often a better choice for empirical applications in finance. |
Authors | Adams, Zeno; Füss, Roland & Glück, Thorsten |
Journal or Publication Title | Journal of banking and finance |
Language | English |
Keywords | Change-point tests; Correlation breaks; Dynamic conditional correlation (DCC); Multivariate GARCH models; Spurious conditional correlation |
Subjects | business studies economics finance |
HSG Classification | contribution to scientific community |
HSG Profile Area | None |
Refereed | Yes |
Date | November 2017 |
Publisher | Elsevier North-Holland |
Place of Publication | Amsterdam |
Volume | 84 |
Page Range | 9-24 |
Number of Pages | 23 |
ISSN | 0378-4266 |
ISSN-Digital | 1872-6372 |
Publisher DOI | https://doi.org/10.1016/j.jbankfin.2017.07.003 |
Official URL | http://www.sciencedirect.com/science/article/pii/S... |
Contact Email Address | roland.fuess@unisg.ch |
Depositing User | Geraldine Frei-Böbel |
Date Deposited | 27 Jun 2016 14:42 |
Last Modified | 20 Jul 2022 17:28 |
URI: | https://www.alexandria.unisg.ch/publications/248601 |
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CitationAdams, Zeno; Füss, Roland & Glück, Thorsten (2017) Are Correlations Constant? Empirical and Theoretical Results on Popular Correlation Models in Finance. Journal of banking and finance, 84 9-24. ISSN 0378-4266 Statisticshttps://www.alexandria.unisg.ch/id/eprint/248601
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