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Flexible Multivariate GARCH Modeling with an Application to International Stock Markets

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  • Olivier Ledoit

    (Credit Suisse First Boston)

  • Pedro Santa-Clara

    (The Anderson School, UCLA)

  • Michael Wolf

    (Universitat Pompeu Fabra)

Abstract

This paper offers a new approach to estimating time-varying covariance matrices in the framework of the diagonal-vech version of the multivariate GARCH(1,1) model. Our method is numerically feasible for large-scale problems, produces positive semidefinite conditional covariance matrices, and does not impose unrealistic a priori restrictions. We provide an empirical application in the context of international stock markets, comparing the new estimator with a number of existing ones. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 85 (2003)
Issue (Month): 3 (August)
Pages: 735-747

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Handle: RePEc:tpr:restat:v:85:y:2003:i:3:p:735-747

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  1. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  2. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 116-31, February.
  3. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 72(3), pages 498-505, August.
  4. Andersen, Torben G. & Bollerslev, Tim & Lange, Steve, 1999. "Forecasting financial market volatility: Sample frequency vis-a-vis forecast horizon," Journal of Empirical Finance, Elsevier, Elsevier, vol. 6(5), pages 457-477, December.
  5. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 122-150, February.
  6. Engle, Robert F, 2000. "Dynamic Conditional Correlation - A Simple Class of Multivariate GARCH Models," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt56j4143f, Department of Economics, UC San Diego.
  7. Tae-Hwy Lee & Yong Bao & Burak Saltoglu, 2006. "Evaluating predictive performance of value-at-risk models in emerging markets: a reality check," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(2), pages 101-128.
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