Projected Dynamic Conditional Correlations

39 Pages Posted: 11 May 2020 Last revised: 18 May 2020

See all articles by Christian T. Brownlees

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

Jordi Llorens-Terrazas

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: April 15, 2020

Abstract

We propose a novel specification of the Dynamic Conditional Correlation (DCC) model based on an alternative normalization of the pseudo-correlation matrix called Projected DCC (Pro-DCC). Our modification consists in projecting, rather than re-scaling, the pseudo-correlation matrix onto the set of correlation matrices in order to obtain a well defined conditional correlation matrix. A simulation study shows that projecting performs better than re-scaling when the dimensionality of the correlation matrix is large. An empirical application to the constituents of the S&P 100 shows that the proposed methodology performs favorably to the standard DCC in an out-of-sample asset allocation exercise.

Keywords: Multivariate Volatility, Dcc, Bregman Projection, Nearest-Correlation Matrix, Stein’s Loss

JEL Classification: C13, C32, C58, G11

Suggested Citation

Brownlees, Christian T. and Llorens-Terrazas, Jordi, Projected Dynamic Conditional Correlations (April 15, 2020). Available at SSRN: https://ssrn.com/abstract=3576985 or http://dx.doi.org/10.2139/ssrn.3576985

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://84.89.132.1/~cbrownlees/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain

Jordi Llorens-Terrazas (Contact Author)

Universitat Pompeu Fabra ( email )

Barcelona
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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