A dynamic conditional score model for the log correlation matrix
(2019) , 45 pages
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- Abstract
- This paper proposes a new model for the dynamics of correlation matrices, where the dynamics are driven by the likelihood score with respect to the matrix logarithm of the correlation matrix. In analogy to the exponential GARCH model for volatility, this transformation ensures that the correlation matrices remain positive definite, even in high dimensions. For the conditional distribution of returns we assume a student-t copula to explain the dependence structure and univariate student-t for the marginals with potentially different degrees of freedom. The separation into volatility and correlation parts allows two-step estimation, which facilitates estimation in high dimensions. We derive estimation theory for one-step and two-step estimation. In an application to a set of six asset indices including financial and alternative assets we show that the model performs well in terms of various diagnostics and specification tests.
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Citations
Hafner, C., & Wang, L. (2019). A dynamic conditional score model for the log correlation matrix (CORE Discussion Papers 2019/31). https://hdl.handle.net/2078.5/123468