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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27884
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| Title: | Dynamic Equicorrelation |
| Authors: | Engle, Robert
Kelly, Bryan |
| Issue Date: | 9-Feb-2009 |
| Series/Report no.: | FIN-08-038 |
| Abstract: | A new covariance matrix estimator is proposed under the assumption that
at every time period all pairwise correlations are equal. This
assumption, which is pragmati- cally applied in various areas of
finance, makes it possible to estimate arbitrarily large covariance
matrices with ease. The model, called DECO, is a special case of the CCC
and DCC models which involve first adjusting for individual volatilities
and then estimating the correlations. A QMLE result shows that DECO can
continue to give consistent parameter estimates when the equicorrelation
assumption is violated. Generalizations to block equicorrelation
structures, models with exogenous variables, and alternative
specifications are explored and diagnostic tests are proposed.
Estimation is evaluated by Monte Carlo and using US stock return data. |
| URI: | http://hdl.handle.net/2451/27884 |
| Appears in Collections: | Finance Working Papers
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