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Dynamic conditional angular correlation

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  • Jarjour, Riad
  • Chan, Kung-Sik

Abstract

We introduce the concept of angular correlation for estimating the instantaneous correlation matrix with a single multivariate realization. The proposed estimator is generally a positive definite correlation matrix and robust in that for bivariate normal data, the sample angular correlation is equally likely to be above or below the population correlation coefficient. We then generalize the dynamic conditional correlation (DCC) model to the dynamic conditional angular correlation (DCAC) model. We demonstrate the efficacy and robustness of the proposed methods against leptokurticity, with some numerical experiments. In particular, a real application illustrates the better performance of the DCAC model than the DCC model in portfolio construction.

Suggested Citation

  • Jarjour, Riad & Chan, Kung-Sik, 2020. "Dynamic conditional angular correlation," Journal of Econometrics, Elsevier, vol. 216(1), pages 137-150.
    • Handle: RePEc:eee:econom:v:216:y:2020:i:1:p:137-150
    DOI: 10.1016/j.jeconom.2020.01.010
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    Cited by:

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    2. Lee, Hsiang-Tai, 2022. "Regime-switching angular correlation diversification," Finance Research Letters, Elsevier, vol. 50(C).
    3. Chazi, Abdelaziz & Samet, Anis & Azad, A.S.M. Sohel, 2023. "Volatility and correlation of Islamic and conventional indices during crises," Global Finance Journal, Elsevier, vol. 55(C).
    4. Ángeles Cebrián-Hernández & Enrique Jiménez-Rodríguez, 2021. "Modeling of the Bitcoin Volatility through Key Financial Environment Variables: An Application of Conditional Correlation MGARCH Models," Mathematics, MDPI, vol. 9(3), pages 1-16, January.
    5. Fiszeder, Piotr & Fałdziński, Marcin & Molnár, Peter, 2023. "Modeling and forecasting dynamic conditional correlations with opening, high, low, and closing prices," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 308-321.

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    More about this item

    Keywords

    Instantaneous correlation matrix; Portfolio construction; Positive definiteness; Robustness; Volatility;
    All these keywords.

    JEL classification:

    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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