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The Methodology and Practice of EconometricsA Festschrift in Honour of David F. Hendry$
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Jennifer Castle and Neil Shephard

Print publication date: 2009

Print ISBN-13: 9780199237197

Published to Oxford Scholarship Online: September 2009

DOI: 10.1093/acprof:oso/9780199237197.001.0001

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High Dimension Dynamic Correlations

High Dimension Dynamic Correlations

Chapter:
(p.122) 5 High Dimension Dynamic Correlations
Source:
The Methodology and Practice of Econometrics
Author(s):

Robert F. Engle

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199237197.003.0005

This chapter develops time series methods for forecasting correlations in high dimensional problems. The Dynamic Conditional Correlation model is given a new convenient estimation approach called the MacGyver method. It is compared with the FACTOR ARCH model and a new model called the FACTOR DOUBLE ARCH model. Finally the latter model is blended with the DCC to give a FACTOR DCC model. This family of models is estimated with daily returns from eighteen US large cap stocks. Economic loss functions designed to form optimal portfolios and optimal hedges are used to compare the performance of the methods. The best approach invariably is the FACTOR DCC and the next best is the FACTOR DOUBLE ARCH.

Keywords:   correlations, Dynamic Conditional Correlation model, MacGyver method, FACTOR DCC, FACTOR ARCH, FACTOR DOUBLE ARCH

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