Forecasting correlations during the late-2000s financial crisis : The short-run component, the long-run component, and structural breaks
Journal
Computational Statistics & Data Analysis
ISSN
0167-9473
ISSN-Digital
1872-7352
Type
journal article
Date Issued
2014-08
Author(s)
Abstract
The predictive power of recently introduced components affecting correlations is investigated. The focus is on models allowing for a flexible specification of the short-run component of correlations as well as the long-run component. Moreover, models allowing the correlation dynamics to be subjected to regime-shift caused by threshold-based structural breaks of a different nature are also considered. The results indicate that in some cases there may be a superimposition of the long-term and short-term movements in correlations. Therefore, care is called for in interpretations when estimating the two components. Testing the forecasting accuracy of correlations during the late-2000s financial crisis yields mixed results. In general, component models allowing for a richer correlation specification possess an increased predictive accuracy. Economically speaking, no relevant gains are found by allowing for more flexibility in the correlation dynamics.
Language
English
Keywords
Correlation forecasting
Component models
Threshold regime-switching models
Mixed data sampling
Performance evaluation.
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Elsevier Science
Publisher place
Amsterdam
Volume
76
Number
August 2014
Start page
43
End page
60
Pages
18
Subject(s)
Eprints ID
223241