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Testing for constant correlation by means of trigonometric functions

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  • Fischer, Matthias J.

Abstract

A new test for constant correlation is proposed. The TC-test is derived as Lagrange multiplier (LM) test. Whereas most of the traditional tests (e.g. Jennrich, 1970, Tang, 1995 and Goetzmann, Li & Rouwenhorst, 2005) specify the unknown correlations as piecewise constant, our model-setup for the correlation coefficient is based on trigonometric functions. The simulation results demonstrate that the TC-test guarantees correct empirical size, is powerful against many alternatives and able to detect structural breaks in correlations. Finally, application of the TC-test to foreign exchange rate data over the period of 15 years is given.

Suggested Citation

  • Fischer, Matthias J., 2006. "Testing for constant correlation by means of trigonometric functions," Discussion Papers 74/2006, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Statistics and Econometrics.
    • Handle: RePEc:zbw:faucse:742006
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    1. S. Kullback, 1967. "On Testing Correlation Matrices," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 16(1), pages 80-85, March.
    2. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
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