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A Component Model for Dynamic CorrelationsRiccardo ColacitoUniversity of North Carolina, Chapel Hill - Kenan-Flagler Business School Robert F. EngleNew York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance Eric GhyselsUniversity of North Carolina (UNC) at Chapel Hill - Department of Economics; University of North Carolina (UNC) at Chapel Hill - Finance Area February 1, 2009 Journal of Econometrics, Forthcoming Abstract: The idea of component models for volatility is extended to dynamic correlations. We propose a model of dynamic correlations with a short- and long-run component specification. We call this class of models DCC-MIDAS as the key ingredients are a combination of the Engle (2002) DCC model, the Engle and Lee (1999) component GARCH model to replace the original DCC dynamics with a component specification and the Engle, Ghysels, and Sohn (2006) GARCH-MIDAS component specification that allows us to extract a long-run correlation component via mixed data sampling. We provide a comprehensive econometric analysis of the new class of models, including conditions for positive semi-definiteness, and provide extensive empirical evidence that supports the model specification.
Number of Pages in PDF File: 51 Accepted Paper SeriesDate posted: March 9, 2009 ; Last revised: September 18, 2012Suggested CitationContact Information
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