Multivariate Regime Switching GARCH Model Application to Portfolio and Risk Management

Regime switching dynamic correlation (RSDC) model allows the correlations to be constant with the regimes themselves however, it differs across regimes. RSDC model has retained many good properties from CCC multivariate GARCH and DCC multivariate GARCH. For example, RSDC does not suffer from the curse of dimensional due to the two steps estimation for volatility. Positive semi definite is also easy to achieve from its decomposition from covariances. In this research, the feasibility of the constant correlations assumptions have been tested using Lagrange Multiplier test developed by Tse (2000) on the RSDC model