A Test for Constant Correlations in a Multivariate Garch Model

We introduce a Lagrange Multiplier (LM) test for the constant-correlation hypothesis in a multivariate GARCH model. The test examines the restrictions imposed on a model which encompasses the constant-correlation multivariate GARCH model. It requires the estimates of the constant-correlation model o...

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Main Author: TSE, Yiu Kuen
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Language:English
Published: Institutional Knowledge at Singapore Management University 2000
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Online Access:https://ink.library.smu.edu.sg/soe_research/273
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spelling sg-smu-ink.soe_research-12722010-09-23T05:48:03Z A Test for Constant Correlations in a Multivariate Garch Model TSE, Yiu Kuen We introduce a Lagrange Multiplier (LM) test for the constant-correlation hypothesis in a multivariate GARCH model. The test examines the restrictions imposed on a model which encompasses the constant-correlation multivariate GARCH model. It requires the estimates of the constant-correlation model only and is computationally convenient. We report some Monte Carlo results on the finite-sample properties of the LM statistic. The LM test is compared against the Information Matrix (IM) test due to Bera and Kim (1996). The LM test appears to have good power against the alternatives considered and is more robust to nonnormality. We apply the test to three data sets, namely, spot-futures prices, foreign exchange rates and stock market returns. The results show that the spot-futures and foreign exchange data have constant correlations, while the correlations across national stock market returns are time varying. 2000-01-01T08:00:00Z text https://ink.library.smu.edu.sg/soe_research/273 info:doi/10.1016/s0304-4076(99)00080-9 Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University Economics
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Economics
spellingShingle Economics
TSE, Yiu Kuen
A Test for Constant Correlations in a Multivariate Garch Model
description We introduce a Lagrange Multiplier (LM) test for the constant-correlation hypothesis in a multivariate GARCH model. The test examines the restrictions imposed on a model which encompasses the constant-correlation multivariate GARCH model. It requires the estimates of the constant-correlation model only and is computationally convenient. We report some Monte Carlo results on the finite-sample properties of the LM statistic. The LM test is compared against the Information Matrix (IM) test due to Bera and Kim (1996). The LM test appears to have good power against the alternatives considered and is more robust to nonnormality. We apply the test to three data sets, namely, spot-futures prices, foreign exchange rates and stock market returns. The results show that the spot-futures and foreign exchange data have constant correlations, while the correlations across national stock market returns are time varying.
format text
author TSE, Yiu Kuen
author_facet TSE, Yiu Kuen
author_sort TSE, Yiu Kuen
title A Test for Constant Correlations in a Multivariate Garch Model
title_short A Test for Constant Correlations in a Multivariate Garch Model
title_full A Test for Constant Correlations in a Multivariate Garch Model
title_fullStr A Test for Constant Correlations in a Multivariate Garch Model
title_full_unstemmed A Test for Constant Correlations in a Multivariate Garch Model
title_sort test for constant correlations in a multivariate garch model
publisher Institutional Knowledge at Singapore Management University
publishDate 2000
url https://ink.library.smu.edu.sg/soe_research/273
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