Anticipating Correlations ：A New Paradigm for Risk Management ( The Econometric and Tinbergen Institutes Lectures )

Publication subTitle ：A New Paradigm for Risk Management

Publication series ：The Econometric and Tinbergen Institutes Lectures

Author： Engle Robert;;;  

Publisher： Princeton University Press‎

Publication year： 2009

E-ISBN: 9781400830190

P-ISBN(Paperback): 9780691116419

Subject： F224.0 Quantitative Economics

Keyword： 经济计划与管理,财政、金融

Language： ENG

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Description

Financial markets respond to information virtually instantaneously. Each new piece of information influences the prices of assets and their correlations with each other, and as the system rapidly changes, so too do correlation forecasts. This fast-evolving environment presents econometricians with the challenge of forecasting dynamic correlations, which are essential inputs to risk measurement, portfolio allocation, derivative pricing, and many other critical financial activities. In Anticipating Correlations, Nobel Prize-winning economist Robert Engle introduces an important new method for estimating correlations for large systems of assets: Dynamic Conditional Correlation (DCC).

Engle demonstrates the role of correlations in financial decision making, and addresses the economic underpinnings and theoretical properties of correlations and their relation to other measures of dependence. He compares DCC with other correlation estimators such as historical correlation, exponential smoothing, and multivariate GARCH, and he presents a range of important applications of DCC. Engle presents the asymmetric model and illustrates it using a multicountry equity and bond return model. He introduces the new FACTOR DCC model that blends factor models with the DCC to produce a model with the best features of both, and illustrates it using an array of U.S. large-cap equities. Engle shows how overinvestment in collateralized debt obligations, or CDOs, lies at the heart o

Chapter

Contents

Introduction

1 Correlation Economics

1.1 Introduction

1.2 How Big Are Correlations?

1.3 The Economics of Correlations

1.4 An Economic Model of Correlations

1.5 Additional Influences on Correlations

2 Correlations in Theory

2.1 Conditional Correlations

2.2 Copulas

2.3 Dependence Measures

2.4 On the Value of Accurate Correlations

3 Models for Correlation

3.1 The Moving Average and the Exponential Smoother

3.2 Vector GARCH

3.3 Matrix Formulations and Results for Vector GARCH

3.4 Constant Conditional Correlation

3.5 Orthogonal GARCH

3.6 Dynamic Conditional Correlation

3.7 Alternative Approaches and Expanded Data Sets

4 Dynamic Conditional Correlation

4.1 DE-GARCHING

4.2 Estimating the Quasi-Correlations

4.3 Rescaling in DCC

4.4 Estimation of the DCC Model

5 DCC Performance

5.1 Monte Carlo Performance of DCC

5.2 Empirical Performance

6 The MacGyver Method

7 Generalized DCC Models

7.1 Theoretical Specification

7.2 Estimating Correlations for Global Stock and Bond Returns

8 FACTOR DCC

8.1 Formulation of Factor Versions of DCC

8.2 Estimation of Factor Models

9 Anticipating Correlations

9.1 Forecasting

9.2 Long-Run Forecasting

9.3 Hedging Performance In-Sample

9.4 Out-of-Sample Hedging

9.5 Forecasting Risk in the Summer of 2007

10 Credit Risk and Correlations

11 Econometric Analysis of the DCC Model

11.1 Variance Targeting

11.2 Correlation Targeting

11.3 Asymptotic Distribution of DCC

12 Conclusions

References

Index

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