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Multivariate mixed normal conditional heteroskedasticity

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Author Info
BAUWENS, Luc
HAFNER, Christian
ROMBOUTS, Jeroen

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Abstract

We propose a new multivariate volatility model where the conditional distribution of a vector time series is given by a mixture of multivariate normal distributions. Each of these distributions is allowed to have a time-varying covariance matrix. The process can be globally covariance- stationary even though some components are not covariance-stationary. We derive some theo- retical properties of the model such as the unconditional covariance matrix and autocorrelations of squared returns. The complexity of the model requires a powerful estimation algorithm. In a simulation study we compare estimation by maximum likelihood with the EM algorithm and Bayesian estimation with a Gibbs sampler. Finally, we apply the model to daily U.S. stock returns.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006012.

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Date of creation: 01 Feb 2006
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Handle: RePEc:cor:louvco:2006012

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Related research
Keywords: multivariate volatility; Þnite mixture; EM algorithm; Bayesian inference;

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Christian M. Hafner, 2003. "Fourth Moment Structure of Multivariate GARCH Models," Journal of Financial Econometrics, Oxford University Press, vol. 1(1), pages 26-54.
  2. Markus Haas, 2004. "Mixed Normal Conditional Heteroskedasticity," Journal of Financial Econometrics, Oxford University Press, vol. 2(2), pages 211-250. [Downloadable!] (restricted)
  3. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109. [Downloadable!]
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  4. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September. [Downloadable!] (restricted)
  5. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mohammed Bouaddi & Jeroen V.K. Rombouts, 2007. "Mixed Exponential Power Asymmetric Conditional Heteroskedasticity," Cahiers de recherche 0749, CIRPEE. [Downloadable!]
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