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Book part
Publication date: 12 December 2007

Stuart Hyde, Don Bredin and Nghia Nguyen

This chapter investigates the correlation dynamics in the equity markets of 13 Asia-Pacific countries, Europe and the US using the asymmetric dynamic conditional correlation GARCH…

Abstract

This chapter investigates the correlation dynamics in the equity markets of 13 Asia-Pacific countries, Europe and the US using the asymmetric dynamic conditional correlation GARCH model (AG-DCC-GARCH) introduced by Cappiello, Engle, and Sheppard (2006). We find significant variation in correlation between markets through time. Stocks exhibit asymmetries in conditional correlations in addition to conditional volatility. Yet asymmetry is less apparent in less integrated markets. The Asian crisis acts as a structural break, with correlations increasing markedly between crisis countries during this period though the bear market in the early 2000s is a more significant event for correlations with developed markets. Our findings also provide further evidence consistent with increasing global market integration. The documented asymmetries and correlation dynamics have important implications for international portfolio diversification and asset allocation.

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Asia-Pacific Financial Markets: Integration, Innovation and Challenges
Type: Book
ISBN: 978-0-7623-1471-3

Book part
Publication date: 29 March 2006

Christian M. Hafner, Dick van Dijk and Philip Hans Franses

In this paper we develop a new semi-parametric model for conditional correlations, which combines parametric univariate Generalized Auto Regressive Conditional Heteroskedasticity…

Abstract

In this paper we develop a new semi-parametric model for conditional correlations, which combines parametric univariate Generalized Auto Regressive Conditional Heteroskedasticity specifications for the individual conditional volatilities with nonparametric kernel regression for the conditional correlations. This approach not only avoids the proliferation of parameters as the number of assets becomes large, which typically happens in conventional multivariate conditional volatility models, but also the rigid structure imposed by more parsimonious models, such as the dynamic conditional correlation model. An empirical application to the 30 Dow Jones stocks demonstrates that the model is able to capture interesting asymmetries in correlations and that it is competitive with standard parametric models in terms of constructing minimum variance portfolios and minimum tracking error portfolios.

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Econometric Analysis of Financial and Economic Time Series
Type: Book
ISBN: 978-0-76231-274-0

Book part
Publication date: 1 December 2008

Kanak Patel and Ricardo Pereira

This chapter analyses the ability of some structural models to predict corporate bankruptcy. The study extends the existing empirical work on default risk in two ways. First, it…

Abstract

This chapter analyses the ability of some structural models to predict corporate bankruptcy. The study extends the existing empirical work on default risk in two ways. First, it estimates the expected default probabilities (EDPs) for a sample of bankrupt companies in the USA as a function of volatility, debt ratio, and other company variables. Second, it computes default correlations using a copula function and extracts common or latent factors that drive companies’ default correlations using a factor-analytical technique. Idiosyncratic risk is observed to change significantly prior to bankruptcy and its impact on EDPs is found to be more important than that of total volatility. Information-related tests corroborate the results of prediction-orientated tests reported by other studies in the literature; however, only a weak explanatory power is found in the widely used market-to-book assets and book-to-market equity ratio. The results indicate that common factors, which capture the overall state of the economy, explain default correlations quite well.

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Econometrics and Risk Management
Type: Book
ISBN: 978-1-84855-196-1

Book part
Publication date: 29 March 2006

Dirk Baur

Existing multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models either impose strong restrictions on the parameters or do not guarantee a…

Abstract

Existing multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models either impose strong restrictions on the parameters or do not guarantee a well-defined (positive-definite) covariance matrix. I discuss the main multivariate GARCH models and focus on the BEKK model for which it is shown that the covariance and correlation is not adequately specified under certain conditions. This implies that any analysis of the persistence and the asymmetry of the correlation is potentially inaccurate. I therefore propose a new Flexible Dynamic Correlation (FDC) model that parameterizes the conditional correlation directly and eliminates various shortcomings. Most importantly, the number of exogenous variables in the correlation equation can be flexibly augmented without risking an indefinite covariance matrix. Empirical results of daily and monthly returns of four international stock market indices reveal that correlations exhibit different degrees of persistence and different asymmetric reactions to shocks than variances. In addition, I find that correlations do not always increase with jointly negative shocks implying a justification for international portfolio diversification.

Details

Econometric Analysis of Financial and Economic Time Series
Type: Book
ISBN: 978-0-76231-274-0

Book part
Publication date: 17 January 2009

Huijing Chen and John E. Boylan

The forecasting needs for inventory control purposes are hierarchical. For stock keeping units (SKUs) in a product family or a SKU stored across different depot locations…

Abstract

The forecasting needs for inventory control purposes are hierarchical. For stock keeping units (SKUs) in a product family or a SKU stored across different depot locations, forecasts can be made from the individual series’ history or derived top–down. Many discussions have been found in the literature, but it is not clear under what conditions one approach is better than the other. Correlation between demands has been identified as a very important factor to affect the performance of the two approaches, but there has been much confusion on whether it is positive or negative correlation. This chapter summarises the conflicting discussions in the literature, argues that it is negative correlation that benefits the top–down or grouping approach, and quantifies the effect of correlation through simulation experiments.

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Advances in Business and Management Forecasting
Type: Book
ISBN: 978-1-84855-548-8

Book part
Publication date: 29 August 2005

Kai S. Cortina, Hans Anand Pant and Joanne Smith-Darden

Over the last decade, latent growth modeling (LGM) utilizing hierarchical linear models or structural equation models has become a widely applied approach in the analysis of…

Abstract

Over the last decade, latent growth modeling (LGM) utilizing hierarchical linear models or structural equation models has become a widely applied approach in the analysis of change. By analyzing two or more variables simultaneously, the current method provides a straightforward generalization of this idea. From a theory of change perspective, this chapter demonstrates ways to prescreen the covariance matrix in repeated measurement, which allows for the identification of major trends in the data prior to running the multivariate LGM. A three-step approach is suggested and explained using an empirical study published in the Journal of Applied Psychology.

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Multi-Level Issues in Strategy and Methods
Type: Book
ISBN: 978-1-84950-330-3

Book part
Publication date: 2 March 2011

Dimitrios I. Vortelinos

In this chapter, I examine the properties of four realized correlation estimators and model their jumps. The correlations are between the three main FTSE indices of the Athens…

Abstract

In this chapter, I examine the properties of four realized correlation estimators and model their jumps. The correlations are between the three main FTSE indices of the Athens Stock Exchange. Using intraday data I first construct four state-of-the-art realized correlation estimators which I then use in testing for normality, long memory, asymmetries and jumps and also in modelling for jumps. Jumps are detected when the realized correlation is higher than 0.99 and lower than 0.01 in absolute values. Then the realized correlation is modelled with the simple heterogeneous autoregressive (HAR) model and the HAR model with jumps (HAR-J). This is the first time, to the best of my knowledge, that the realized correlation between the three indices for the Greek equity market is examined.

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The Impact of the Global Financial Crisis on Emerging Financial Markets
Type: Book
ISBN: 978-0-85724-754-4

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Book part
Publication date: 15 April 2020

Timothy Dombrowski, R. Kelley Pace and Rajesh P. Narayanan

Portfolios of mortgage loans played an important role in the Great Recession and continue to compose a material part of bank assets. This chapter investigates how cross-sectional…

Abstract

Portfolios of mortgage loans played an important role in the Great Recession and continue to compose a material part of bank assets. This chapter investigates how cross-sectional dependence in the underlying properties flows through to the loan returns, and thus, the risk of the portfolio. At one extreme, a portfolio of foreclosed mortgage loans becomes a portfolio of real estate whose returns exhibit substantial cross-sectional and spatial dependence. Near the other extreme, almost all loans perform and yield constant returns, which do not correlate with other performing loan returns. This suggests that loan performance effectively censors the random returns of the underlying properties. Following the statistical properties of the correlations among censored variables, the authors build off this foundation and show how the loan return correlations will rise as economic conditions deteriorate and the defaulting loans reveal the underlying housing correlations. In this chapter, the authors (1) adapt tools from spatial statistics to document substantial cross-sectional dependence across house price returns and examine the spatial structure of this dependence, (2) investigate the nonlinear nature of correlations among loan returns as a function of the default rate and the underlying house price correlations, and (3) conduct a simulation exercise using parameters from the empirical data to show the implications for holding a portfolio of mortgages.

Book part
Publication date: 19 December 2012

Joseph H. Haslag and Yu-Chin Hsu

In this chapter, we examine the relationship between the cyclical components of output, the price level and the inflation rate. During the post-war period, there is a negative…

Abstract

In this chapter, we examine the relationship between the cyclical components of output, the price level and the inflation rate. During the post-war period, there is a negative correlation between output and the price level and a positive correlation between output and the inflation rate. A phase shift in the cyclical component between output and the price level can account for these two facts. The phase shift is consistent with movements in the price level Granger causes movements in output. In addition, we consider time-varying correlations between the two pairs of series. Spectral analysis suggest the price and output have different wavelengths, but the difference is not statistically significant.

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30th Anniversary Edition
Type: Book
ISBN: 978-1-78190-309-4

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Book part
Publication date: 30 January 2013

Gary N. Marks

Since the early 1990s there has been a growing body of research on intergenerational income elasticities and correlations. One of the most prominent findings is that these…

Abstract

Since the early 1990s there has been a growing body of research on intergenerational income elasticities and correlations. One of the most prominent findings is that these associations are much higher in the United States (and the United Kingdom) than in Canada, Australia and many European countries. This finding is often interpreted as America being much less fair than other industrialized societies since the reproduction of economic inequalities is substantially stronger. This chapter questions these conclusions on the following grounds: (i) inconsistencies with other outcomes, such as socio-economic inequalities in student achievement, educational attainment, occupation attainment and the patterning of intergenerational occupational mobility, (ii) family income having weaker effects on educational attainment (which has substantial effects on earnings and income) than other parental characteristics and (iii) methodological issues such as estimates based on the concept of ‘permanent income’ and the use of instrumental variables. Even if the consensus estimate of 0.4 for the intergenerational correlation in the United States is accepted, it may not mean that the United States is unusually unfair due to larger regional differences in labour market returns and/or stronger associations between parents’ and their children's ability, ability and education attainment, and education and earnings.

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Class and Stratification Analysis
Type: Book
ISBN: 978-1-78190-537-1

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