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Testing for constant correlation of filtered series under structural change

Author

Listed:
  • Matei Demetrescu
  • Dominik Wied

Abstract

SummaryThe paper proposes a test for constant correlations that allow for breaks at unknown times in the marginal means and variances. Theoretically and in an application to US and German stock returns, we find that not accounting for changes in the marginal moments has severe consequences. This is because incorrect standardization of the series transfers to the sample correlations onto which the tests are built. Correcting for variance breaks at unknown time will have an asymptotic effect. To discuss adjustments, we tackle the issue more generally by considering partial-sums-based inference on moment properties of unobserved processes that is conducted on the basis of estimated counterparts obtained in a preliminary step. The paper gives a characterization of the conditions under which the effect of filtering does not vanish asymptotically. The analysis extends to models with breaks in parameters at estimated time.

Suggested Citation

  • Matei Demetrescu & Dominik Wied, 2019. "Testing for constant correlation of filtered series under structural change," The Econometrics Journal, Royal Economic Society, vol. 22(1), pages 10-33.
    • Handle: RePEc:oup:emjrnl:v:22:y:2019:i:1:p:10-33.
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    File URL: http://hdl.handle.net/10.1111/ectj.12116
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    Citations

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    Cited by:

    1. Bampinas, Georgios & Panagiotidis, Theodore & Politsidis, Panagiotis N., 2023. "Sovereign bond and CDS market contagion: A story from the Eurozone crisis," Journal of International Money and Finance, Elsevier, vol. 137(C).
    2. Hong, Yongmiao & Linton, Oliver & McCabe, Brendan & Sun, Jiajing & Wang, Shouyang, 2024. "Kolmogorov–Smirnov type testing for structural breaks: A new adjusted-range based self-normalization approach," Journal of Econometrics, Elsevier, vol. 238(2).
    3. Ji-Eun Choi & Dong Wan Shin, 2021. "A self-normalization break test for correlation matrix," Statistical Papers, Springer, vol. 62(5), pages 2333-2353, October.
    4. Nils Bertschinger & Axel A. Araneda, 2021. "Cross-ownership as a structural explanation for rising correlations in crisis times," Papers 2112.04824, arXiv.org.

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