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A parsimonious test of constancy of a positive definite correlation matrix in a multivariate time-varying GARCH model

Author

Listed:
  • Jian Kang

    (School of Finance, Dongbei University of Finance and Economics)

  • Johan Stax Jakobsen

    (Copenhagen Business School and CREATES)

  • Annastiina Silvennoinen

    (NCER, Queensland University of Technology)

  • Timo Teräsvirta

    (Aarhus University, CREATES, C.A.S.E, Humboldt-Universität zu Berlin)

  • Glen Wade

    (NCER, Queensland University of Technology)

Abstract

We construct a parsimonious test of constancy of the correlation matrix in the multivariate conditional correlation GARCH model, where the GARCH equations are time-varying. The alternative to constancy is that the correlations change deterministically as a function of time. The alternative is a covariance matrix, not a correlation matrix, so the test may be viewed as a general test of stability of a constant correlation matrix. The size of the test in finite samples is studied by simulation. An empirical example is given.

Suggested Citation

  • Jian Kang & Johan Stax Jakobsen & Annastiina Silvennoinen & Timo Teräsvirta & Glen Wade, 2022. "A parsimonious test of constancy of a positive definite correlation matrix in a multivariate time-varying GARCH model," CREATES Research Papers 2022-01, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2022-01
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    More about this item

    Keywords

    Deterministically varying correlation; multiplicative time-varying GARCH; multivariate GARCH; nonstationary volatility; smooth transition GARCH;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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