On the Characteristics of Dynamic Correlations between Asset Pairs

Research in International Business and Finance, August 2014, v.32, pp. 60-82. DOI:10.1016/j.ribaf.2014.03.004

Posted: 10 Jul 2020

See all articles by Michael Jacobs

Michael Jacobs

PNC Financial Services Group

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business; New York University (NYU) - Volatility and Risk Institute

Date Written: 2014

Abstract

Recent research provides considerable evidence that correlations between assets change significantly over time and diversification benefits of correlations may vary substantially based on the time-varying measure of correlation used for different asset types. Our study evaluates and compares alternative time-series correlation modeling techniques according to both statistical and economic metrics, focusing specifically on individual asset pairs. We identify the moving correlation structure that best tracks the dynamic conditional correlation estimates using a large set of different financial time series encompassing 467 asset pairs in nine different asset classes. Results from our direct, statistical loss function based, and indirect, portfolio mean-variance based, forecast evaluations provide optimal window-length ranges for 36 asset-class pairs which should help in portfolio construction as well as risk management. Furthermore for robustness tests, we implement the model confidence set approach which, without a benchmark specification, produces a set of models constructed to contain the best models with a given level of confidence among competing forecast evaluations.

Keywords: correlation forecasting, dynamic conditional correlation, GARCH, risk management, hedging

JEL Classification: C53, G11, G13, G19

Suggested Citation

Jacobs, Michael and Karagozoglu, Ahmet K, On the Characteristics of Dynamic Correlations between Asset Pairs (2014). Research in International Business and Finance, August 2014, v.32, pp. 60-82. DOI:10.1016/j.ribaf.2014.03.004, Available at SSRN: https://ssrn.com/abstract=3629511

Michael Jacobs

PNC Financial Services Group

1 PNC Plaza, 249 5th Avenue
Pittsburgh, PA 15222-2707
United States

Ahmet K Karagozoglu (Contact Author)

Hofstra University, Zarb School of Business ( email )

Department of Finance
148 Hofstra University
Hempstead, NY 11549-1480
United States
(516) 463-5701 (Phone)
(718) 701-8331 (Fax)

HOME PAGE: http://sites.hofstra.edu/ahmet-karagozoglu

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

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