Engle Anticipating Correlations

A New Paradigm for Risk Management
Course Book
ISBN: 978-1-4008-3019-0
Verlag: De Gruyter
Format: PDF
Kopierschutz: Adobe DRM (»Systemvoraussetzungen)

E-Book, Englisch, 176 Seiten

Reihe: The Econometric and Tinbergen Institutes Lectures

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 of the subprime mortgage crisis--and how the correlation models in this book could have foreseen the risks. A technical chapter of econometric results also is included.

Based on the Econometric and Tinbergen Institutes Lectures, Anticipating Correlations puts powerful new forecasting tools into the hands of researchers, financial analysts, risk managers, derivative quants, and graduate students.

Autoren/Hrsg.

Engle, Robert

Fachgebiete

• Wirtschaftswissenschaften Volkswirtschaftslehre Volkswirtschaftslehre Allgemein Wirtschaftsprognose
• Wirtschaftswissenschaften Finanzsektor & Finanzdienstleistungen Finanzsektor & Finanzdienstleistungen: Allgemeines
• Wirtschaftswissenschaften Volkswirtschaftslehre Volkswirtschaftslehre Allgemein Ökonometrie

Inhaltsverzeichnis

Introduction vii

Chapter 1: Correlation Economics 1

1.1 Introduction 1

1.2 How Big Are Correlations? 3

1.3 The Economics of Correlations 6

1.4 An Economic Model of Correlations 9

1.5 Additional Influences on Correlations 13

Chapter 2: Correlations in Theory 15

2.1 Conditional Correlations 15

2.2 Copulas 17

2.3 Dependence Measures 21

2.4 On the Value of Accurate Correlations 25

Chapter 3: Models for Correlation 29

3.1 The Moving Average and the Exponential Smoother 30

3.2 Vector GARCH 32

3.3 Matrix Formulations and Results for Vector GARCH 33

3.4 Constant Conditional Correlation 37

3.5 Orthogonal GARCH 37

3.6 Dynamic Conditional Correlation 39

3.7 Alternative Approaches and Expanded Data Sets 41

Chapter 4: Dynamic Conditional Correlation 43

4.1 DE-GARCHING 43

4.2 Estimating the Quasi-Correlations 45

4.3 Rescaling in DCC 48

4.4 Estimation of the DCC Model 55

Chapter 5: DCC Performance 59

5.1 Monte Carlo Performance of DCC 59

5.2 Empirical Performance 61

Chapter 6: The MacGyver Method 74

Chapter 7: Generalized DCC Models 80

7.1 Theoretical Specification 80

7.2 Estimating Correlations for Global Stock and Bond Returns 83

Chapter 8: FACTOR DCC 88

8.1 Formulation of Factor Versions of DCC 88

8.2 Estimation of Factor Models 93

Chapter 9: Anticipating Correlations 103

9.1 Forecasting 103

9.2 Long-Run Forecasting 108

9.3 Hedging Performance In-Sample 111

9.4 Out-of-Sample Hedging 112

9.5 Forecasting Risk in the Summer of 2007 117

Chapter 10: Credit Risk and Correlations 122

Chapter 11: Econometric Analysis of the DCC Model 130

11.1 Variance Targeting 130

11.2 Correlation Targeting 131

11.3 Asymptotic Distribution of DCC 134

Chapter 12: Conclusions 137

References 141

Index 151

Über Autor(innen)

Robert Engle is the Michael Armellino Professor in the Management of Financial Services at New York University's Leonard N. Stern School of Business. His books include Cointegration, Causality, and Forecasting. He was awarded the 2003 Nobel Prize in economics.