Forecasting conditional correlations in stock, bond and foreign exchange markets

Unlike conditional volatility that has been investigated intensively, conditional correlations between financial assets have received only little attention in literature. Researchers have, for so long, focused mainly on estimating returns and risk, and have assumed that the correlations are constant and have therefore paid less attention on them. However, recent studies uncover that such correlations vary over time. Therefore, modelling and forecasting future correlations between financial assets become a need. The paper fills the gap by forecasting conditional correlations between three classes of international financial assets, namely stock, bond and foreign exchange, considering the importance of those assets in portfolio construction.