The instability of the correlation structure of the S&P 500

Lyócsa, Štefan and Výrost, Tomáš and Baumöhl, Eduard (2011): The instability of the correlation structure of the S&P 500.

Abstract

Using weekly returns of S&P 500 constituents, we study the time-varying correlation structure during the period of 2006 to mid-2011. Contrary to most of the previous correlation studies of many assets, we do not use rolling correlations but the DCC MV-GARCH model with the MacGyver strategy proposed by Engle (2009). We find empirical evidence that the correlation structure tends to change significantly during the periods of high volatility and market downturns.

• Item Type: MPRA Paper
• Language: English
• Keywords: correlation structure; dynamic conditional correlations; range-based volatility; conditional volatility; MacGyver strategy
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G1 - General Financial Markets

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