Testing Constancy of Correlation and Other Specifications of the Bgarch Model with an Application to International Equity Returns
UIUC Economics Working Paper No.00-124
Posted: 1 May 2001
Date Written: November 2000
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
Suggested Citation: Suggested Citation