A Generalized Dynamic Conditional Correlation Model for Portfolio Risk Evaluation

21 Pages Posted: 30 Nov 2006

See all articles by Monica Billio

Monica Billio

University of Venice - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Date Written: November 2006

Abstract

We propose a generalization of the Dynamic Conditional Correlation multivariate GARCH model of Engle (2002) and of the Asymmetric Dynamic Conditional Correlation model of Cappiello et al. (2006). The model we propose introduces a block structure in parameter matrices that allows for interdependence with a reduced number of parameters. Our model nests the Flexible Dynamic Conditional Correlation model of Billio et al. (2006) and is named Quadratic Flexible Dynamic Conditional Correlation Multivariate GARCH. In the paper, we provide conditions for positive definiteness of the conditional correlations. We also present an empirical application to the Italian stock market comparing alternative correlation models for portfolio risk evaluation.

Keywords: Dynamic correlations, Block-structures, Flexible correlation models

JEL Classification: C51, C32, G18

Suggested Citation

Billio, Monica and Billio, Monica and Caporin, Massimiliano, A Generalized Dynamic Conditional Correlation Model for Portfolio Risk Evaluation (November 2006). University Ca' Foscari of Venice Economics Research Paper No. 53/06, Available at SSRN: https://ssrn.com/abstract=948405 or http://dx.doi.org/10.2139/ssrn.948405

Monica Billio (Contact Author)

University of Venice - Department of Economics ( email )

Fondamenta San Giobbe 873
Venezia 30121
Italy
+39 041 234 9170 (Phone)
+39 041 234 9176 (Fax)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

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