A Test for Long Memory in the Conditional Correlation of Bivariate Returns to Stock and Bond Market Index Futures

22 Pages Posted: 4 Aug 2011

See all articles by Kirt C. Butler

Kirt C. Butler

Michigan State University

William Christopher Gerken

University of Kentucky - Finance

Katsushi Okada

Michigan State University

Date Written: August 3, 2011

Abstract

Long memory is found in the conditional volatilities of financial returns measured at daily or higher frequencies, as well as in residual cross-products in bivariate series. We test for long memory in conditional correlations by extending the fractionally integrated GARCH model to include previous conditional correlations and standardized cross-products in a bivariate system. We apply the model to stock-stock and stock-bond futures index returns using Engle’s (2002) two-stage dynamic conditional correlation approach. We find that cross-products are indeed long memory processes, but that this feature arises from long memory in conditional volatilities and not from long memory in conditional correlation.

Keywords: Long memory, FIGARCH, DCC, conditional volatility, conditional correlation

JEL Classification: G15, G11, C15, C34

Suggested Citation

Butler, Kirt C. and Gerken, William Christopher and Okada, Katsushi, A Test for Long Memory in the Conditional Correlation of Bivariate Returns to Stock and Bond Market Index Futures (August 3, 2011). Available at SSRN: https://ssrn.com/abstract=1905065 or http://dx.doi.org/10.2139/ssrn.1905065

Kirt C. Butler

Michigan State University ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States
517-432-0035 (Phone)
517-432-1080 (Fax)

William Christopher Gerken (Contact Author)

University of Kentucky - Finance ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States

HOME PAGE: http://www.willgerken.com

Katsushi Okada

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
118
Abstract Views
1,712
Rank
425,167
PlumX Metrics