Are Correlations Constant? Empirical and Theoretical Results on Popular Correlation Models in Finance

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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Adams, 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

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https://www.alexandria.unisg.ch/id/eprint/248601

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