Product 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 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.

Product Details

• Amazon Sales Rank: #83415 in Books
• Published on: 2009-02-08
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 176 pages

Review
No doubt much more literature will develop in this area. Professor Engle has done a service by laying out how his mind is moving and thinking at the current time.
(Peter Tompkins The Actuary )

Review
This book offers a comprehensive and thorough discussion of the Dynamic Conditional Correlation class of models. It presents things in an easy-to-read, coherent, and unified framework, and includes new and interesting empirical findings and economic insights. Anticipating Correlations should serve as the authoritative reference for this important class of models.
(Tim Bollerslev, Duke University )

From the Inside Flap

"This book offers a comprehensive and thorough discussion of the Dynamic Conditional Correlation class of models. It presents things in an easy-to-read, coherent, and unified framework, and includes new and interesting empirical findings and economic insights. Anticipating Correlations should serve as the authoritative reference for this important class of models."--Tim Bollerslev, Duke University

"This is a timely volume about how to model the conditional correlations among asset returns. Engle has pioneered much of the field and the book is likely to be popular."--Neil Shephard, University of Oxford

Customer Reviews

only goes up to 2007; nothing about 2008
In a relatively short text, Engle explains ideas for quantifying risks in financial modelling. He takes you rapidly beyond elementary discussions. The modelling involves extensive multivariate analysis, and estimations of the covariance matrix of these variables. The empirical performance of some modelling is described, vis a vis various national stock markets and currencies.

The GARCH model is explained and used in various chapters.

The book came out in 2009, but appears to have be written only up to late 2007. The introduction refers to the "turbulent economic world of 2007". Which was only a prelude to the crashes of 2008 and the presumed Great Recession that we are currently in. While it seems early to speak of an update to this book, that update, to include 2008-9, would be useful.