Abstract

http://ssrn.com/abstract=1963728
 
 

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Spurious Dynamic Conditional Correlation


Roland Füss


University of St. Gallen

Thorsten W. Glück


European Business School (EBS) Wiesbaden, Germany - Department of Finance, Accounting and Real Estate

Jan Mutl


EBS Universität für Wirtschaft und Recht - EBS Business School

September 1, 2013


Abstract:     
Autoregressive-type multivariate GARCH (MGARCH) models have been widely adopted by scholars to measure time-varying correlation structures. It is a well-known stylized fact that conditional correlations generated by these models tend to exhibit a highly unstable and erratic behavior under certain conditions. Therefore, the value added of these scientifically demanding MGARCH techniques remains sometimes ambiguous. In this paper, we provide a measure for the autocovariance structure of conditional correlations generated by a DCC MGARCH under the assumption that true conditional correlations are constant. This allows us to formally demonstrate that autocovariances of conditional correlations generated by an autoregressive-type MGARCH model are highly sensitive to small changes in model parameters. We provide empirical evidence for the impact of parameter changes on forecasting accuracy and show under which conditions a simple rolling window estimator yields superior results.

Number of Pages in PDF File: 34

Keywords: Multivariate GARCH models, dynamic conditional correlation (DCC), constant conditional correlation, rolling window estimator, spurious correlation

JEL Classification: C52, C53

working papers series





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Date posted: November 24, 2011 ; Last revised: September 27, 2013

Suggested Citation

Füss, Roland and Glück, Thorsten W. and Mutl, Jan, Spurious Dynamic Conditional Correlation (September 1, 2013). Available at SSRN: http://ssrn.com/abstract=1963728 or http://dx.doi.org/10.2139/ssrn.1963728

Contact Information

Roland Füss
University of St. Gallen ( email )
Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland
+41 (0)71 224 70 74 (Phone)
+41 (0)71 224 70 88 (Fax)
HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx
Thorsten Willi Glück (Contact Author)
European Business School (EBS) Wiesbaden, Germany - Department of Finance, Accounting and Real Estate ( email )
Gustav-Stresemann-Ring 3
Wiesbaden, Wiesbaden 65189
Germany
+49 611 7102 1232 (Phone)
+49 611 7102 10 1232 (Fax)
HOME PAGE: http://www.ebs.edu
Jan Mutl
EBS Universität für Wirtschaft und Recht - EBS Business School ( email )
Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

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