Dynamic Conditional Correlations for Asymmetric Processes

26 Pages Posted: 2 Sep 2009

See all articles by Manabu Asai

Manabu Asai

Soka University - Faculty of Economics

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Date Written: August 30, 2009

Abstract

The paper develops two Dynamic Conditional Correlation (DCC) models, namely the Wishart DCC (WDCC) model and the Matrix-Exponential Conditional Correlation (MECC) model. The paper applies the WDCC approach to the exponential GARCH (EGARCH) and GJR models to propose asymmetric DCC models. We use the standardized multivariate t-distribution to accommodate heavy-tailed errors. The paper presents an empirical example using the trivariate data of the Nikkei 225, Hang Seng and Straits Times Indices for estimating and forecasting the WDCC-EGARCH and WDCC-GJR models, and compares the performance with the asymmetric BEKK model. The empirical results show that AIC and BIC favour the WDCC-EGARCH model to the WDCC-GJR and asymmetric BEKK models. Moreover, the empirical results indicate that the WDCC-EGARCH-t model produces reasonable VaR threshold forecasts, which are very close to the nominal 1% to 3% values.

Keywords: Dynamic conditional correlations, Wishart distribution, asymmetry, GJR, exponential GARCH, BEKK, heavy tails

JEL Classification: C32, C51, G11, G15

Suggested Citation

Asai, Manabu and McAleer, Michael, Dynamic Conditional Correlations for Asymmetric Processes (August 30, 2009). Available at SSRN: https://ssrn.com/abstract=1464325 or http://dx.doi.org/10.2139/ssrn.1464325

Manabu Asai

Soka University - Faculty of Economics ( email )

1-236 Tangi-cho
Hachioji (city)
Tokyo, 192-8577
Japan

HOME PAGE: http://www.soka.ac.jp/en/#a01

Michael McAleer (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

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