Arbeitspapier
Pooling Dynamic Conditional Correlation models
The Dynamic Conditional Correlation (DCC) model by Engle (2002) has become an extremely popular tool for modeling the time-varying dependence of asset returns. However, applications to large cross-sections have been found to be problematic, due to the curse of dimensionality. We propose a novel DCC model with Conditional LInear Pooling (CLIP-DCC) which endogenously determines an optimal degree of commonality in the correlation innovations, allowing a part of the update to be of reduced dimension. In contrast to existing approaches such as the Dynamic EquiCOrrelation (DECO) model, the CLIP-DCC model does not restrict long-run behavior, thereby naturally complementing target correlation matrix shrinkage approaches. Empirical findings suggest substantial benefits for a minimum-variance investor in real-time. Combining the CLIP-DCC model with target shrinkage yields the largest improvements, confirming that they address distinct parts of uncertainty of the conditional correlation matrix.
- Language
-
Englisch
- Bibliographic citation
-
Series: Tinbergen Institute Discussion Paper ; No. TI 2021-083/IV
- Classification
-
Wirtschaft
- Event
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Geistige Schöpfung
- (who)
-
van Os, Bram
van Dijk, Dick
- Event
-
Veröffentlichung
- (who)
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Tinbergen Institute
- (where)
-
Amsterdam and Rotterdam
- (when)
-
2021
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- van Os, Bram
- van Dijk, Dick
- Tinbergen Institute
Time of origin
- 2021
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