Mathematics – Statistics Theory
Scientific paper
2007-02-27
IMS Lecture Notes Monograph Series 2006, Vol. 52, 210-222
Mathematics
Statistics Theory
Published at http://dx.doi.org/10.1214/074921706000001058 in the IMS Lecture Notes Monograph Series (http://www.imstat.org/p
Scientific paper
10.1214/074921706000001058
Correlations between asset returns are important in many financial applications. In recent years, multivariate volatility models have been used to describe the time-varying feature of the correlations. However, the curse of dimensionality quickly becomes an issue as the number of correlations is $k(k-1)/2$ for $k$ assets. In this paper, we review some of the commonly used models for multivariate volatility and propose a simple approach that is parsimonious and satisfies the positive definite constraints of the time-varying correlation matrix. Real examples are used to demonstrate the proposed model.
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