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"Testing Constancy of Correlation and Other Specifications of the BGARCH Model With an Application to International Equity Returns (Revised)"

Anil K. Bera and Sangwhan Kim

 

First Author :

Anil K. Bera
Economics
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

abera@uiuc.edu

http://www.business.uiuc.edu/faculty/bera.html


Second Author :

Sangwhan Kim
Economics
Korea Institute of Finance

swkim@sun.kif.re.kr

 
 
Abstract :
 
One of the main ingredients in forming an international portfolio is the correlation matrix. The correlations represent the degree of interdependence across markets. With the recent globalization of markets and increased volatility, we can expect these correlations to change over time, and quite possibly to go up. However, the standard practice in modeling asset return dynamics is to assume constant correlation. This parameterization is simple, and it involves a relatively small number of parameters. However, the validity of this assumption remains an empirical question. This paper is concerned with developing a formal test for constancy of correlation, and applying it to financial markets of the USA, Japan, Germany, the UK, France and Italy.
 
 
Manuscript Received : 2001
Manuscript Published : 2001
 
 
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