TABLE OF CONTENTS: 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
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