A Generalized Dynamic Conditional Correlation Model for Portfolio Risk Evaluation
21 Pages Posted: 30 Nov 2006
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: Suggested Citation
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