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Copula--based Specification of vector MEMs

Author

Listed:
  • Fabrizio Cipollini
  • Robert F. Engle
  • Giampiero M. Gallo

Abstract

The Multiplicative Error Model (Engle (2002)) for nonnegative valued processes is specified as the product of a (conditionally autoregressive) scale factor and an innovation process with nonnegative support. A multivariate extension allows for the innovations to be contemporaneously correlated. We overcome the lack of sufficiently flexible probability density functions for such processes by suggesting a copula function approach to estimate the parameters of the scale factors and of the correlations of the innovation processes. We illustrate this vector MEM with an application to the interactions between realized volatility, volume and the number of trades. We show that significantly superior realized volatility forecasts are delivered in the presence of other trading activity indicators and contemporaneous correlations.

Suggested Citation

  • Fabrizio Cipollini & Robert F. Engle & Giampiero M. Gallo, 2016. "Copula--based Specification of vector MEMs," Papers 1604.01338, arXiv.org.
    • Handle: RePEc:arx:papers:1604.01338
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    1. repec:hal:journl:peer-00815564 is not listed on IDEAS
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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