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http://ssrn.com/abstract=260879
 
 

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Testing Constancy of Correlation and Other Specifications of the BGARCH Model with an Application to International Equity Returns


Anil K. Bera


University of Illinois at Urbana-Champaign - Department of Economics

Sangwhan Kim


Korea Institute of Finance

November 2000

UIUC Economics Working Paper No.00-124

Abstract:     
One of the main ingredients in forming an international portfolio is the correlation matrix. The correlations represent the degree of interdependence across markets. With the recent globalization of markets and increased volatility, we can expect these correlations to change over time, and quite possibly to go up. However, the standard practice in modeling asset return dynamics is to assume constant correlation. This parameterization is simple, and it involves a relatively small number of parameters. However, the validity of this assumption remains an empirical question. This paper is concerned with developing a formal test for constancy of correlation, and applying it to financial markets of the USA, Japan, Germany, the UK, France and Italy.

Keywords: Time-varying correlations, stock returns, score test, information matrix test, studentizing

JEL Classification: C52, G11, G15

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Date posted: May 1, 2001  

Suggested Citation

Bera, Anil K. and Kim, Sangwhan, Testing Constancy of Correlation and Other Specifications of the BGARCH Model with an Application to International Equity Returns (November 2000). UIUC Economics Working Paper No.00-124. Available at SSRN: http://ssrn.com/abstract=260879

Contact Information

Anil K. Bera (Contact Author)
University of Illinois at Urbana-Champaign - Department of Economics ( email )
410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333-4596 (Phone)
217-244-6678 (Fax)
Sangwhan Kim
Korea Institute of Finance
4-1 Myung-dong 1-ga
Seoul 100-021
Korea
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