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Title: Neglecting structural breaks when estimating and valuing dynamic correlations for asset allocation
Authors: Halunga, Andreea G. 
Savva, Christos S. 
Keywords: Asset allocation;Multivariate GARCH;Spurious estimation;Structural breaks
Category: Economics and Business
Field: Social Sciences
Issue Date: 2019
Publisher: Taylor and Francis Inc.
Source: Econometric Reviews, 2019, Volume 38, Issue 6, Pages 660-678
Abstract: This paper assesses the econometric and economic value consequences of neglecting structural breaks in dynamic correlation models and in the context of asset allocation framework. It is shown that changes in the parameters of the conditional correlation process can lead to biased estimates of persistence. Monte Carlo simulations reveal that short-run persistence is downward biased while long-run persistence is severely upward biased, leading to spurious high persistence of shocks to conditional correlation. An application to stock returns supports these results and concludes that neglecting such structural shifts could lead to misleading decisions on portfolio diversification, hedging, and risk management.
ISSN: 07474938
DOI: 10.1080/07474938.2017.1411431
Rights: © 2017 Taylor & Francis Group, LLC
Type: Article
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