Advanced Search
MyIDEAS: Login to save this paper or follow this series

Modeling Dynamic Volatilities and Correlations under Skewness and Fat Tails

Contents:

Author Info

  • Xin Zhang

    (VU University Amsterdam)

  • Drew Creal

    (VU University Amsterdam)

  • Siem Jan Koopman

    (VU University Amsterdam)

  • Andre Lucas

    (VU University Amsterdam)

Abstract

We propose a new model for dynamic volatilities and correlations of skewed and heavy-tailed data. Our model endows the Generalized Hyperbolic distribution with time-varying parameters driven by the score of the observation density function. The key novelty in our approach is the fact that the skewed and fat-tailed shape of the distribution directly affects the dynamic behavior of the time-varying parameters. It distinguishes our approach from familiar alternatives such as the generalized autoregressive conditional heteroskedasticity model and the dynamic conditional correlation model where distributional assumptions affect the likelihood but not the parameter dynamics. We present a modified expectation-maximization algorithm to estimate the model. Simulated and empirical evidence shows that the model outperforms its close competitors if skewness and kurtosis are relevant features of the data.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://papers.tinbergen.nl/11078.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-078/2/DSF22.

as in new window
Length:
Date of creation: 13 May 2011
Date of revision:
Handle: RePEc:dgr:uvatin:20110078

Contact details of provider:
Web page: http://www.tinbergen.nl

Related research

Keywords: Dynamic conditional correlations; Generalized Hyperbolic distributions; Observation driven models;

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Bauwens, Luc & Laurent, Sebastien, 2005. "A New Class of Multivariate Skew Densities, With Application to Generalized Autoregressive Conditional Heteroscedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 23, pages 346-354, July.
  2. Nelson, Daniel B & Foster, Dean P, 1994. "Asymptotic Filtering Theory for Univariate ARCH Models," Econometrica, Econometric Society, Econometric Society, vol. 62(1), pages 1-41, January.
  3. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  4. Boswijk, H.P. & Weide, R. van der, 2006. "Wake me up before you GO-GARCH," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 06-13, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. Drew Creal & Siem Jan Koopman & Andre Lucas, 2009. "A General Framework for Observation Driven Time-Varying Parameter Models," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd08-038, Institute of Economic Research, Hitotsubashi University.
  6. Drew Creal & Siem Jan Koopman & Andr� Lucas, 2010. "A Dynamic Multivariate Heavy-Tailed Model for Time-Varying Volatilities and Correlations," Tinbergen Institute Discussion Papers, Tinbergen Institute 10-032/2, Tinbergen Institute.
  7. Francisco Javier Mencía & Enrique Sentana, 2004. "Estimation And Testing Of Dynamic Models With Generalised Hyperbolic Innovations," Working Papers, CEMFI wp2004_0411, CEMFI.
  8. Fiorentini, Gabriele & Sentana, Enrique & Calzolari, Giorgio, 2003. "Maximum Likelihood Estimation and Inference in Multivariate Conditionally Heteroscedastic Dynamic Regression Models with Student t Innovations," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 21(4), pages 532-46, October.
  9. repec:dgr:uvatin:2006079 is not listed on IDEAS
  10. 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.
  11. Asai, Manabu & McAleer, Michael, 2009. "The structure of dynamic correlations in multivariate stochastic volatility models," Journal of Econometrics, Elsevier, Elsevier, vol. 150(2), pages 182-192, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Andre Lucas & Bernd Schwaab & Xin Zhang, 2013. "Measuring Credit Risk in a Large Banking System: Econometric Modeling and Empirics," Tinbergen Institute Discussion Papers, Tinbergen Institute 13-063/IV/DSF56, Tinbergen Institute, revised 30 May 2013.
  2. Harvey, Andrew & Sucarrat, Genaro, 2014. "EGARCH models with fat tails, skewness and leverage," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 76(C), pages 320-338.
  3. Lucas, André & Schwaab, Bernd & Zhang, Xin, 2013. "Conditional and joint credit risk," Working Paper Series, European Central Bank 1621, European Central Bank.
  4. repec:dgr:uvatin:2011176 is not listed on IDEAS
  5. Francisco Blasques & Siem Jan Koopman & Andre Lucas, 2012. "Stationarity and Ergodicity of Univariate Generalized Autoregressive Score Processes," Tinbergen Institute Discussion Papers, Tinbergen Institute 12-059/4, Tinbergen Institute.
  6. repec:dgr:uvatin:2013063 is not listed on IDEAS
  7. André Lucas & Bernd Schwaab & Xin Zhang, 2014. "Conditional Euro Area Sovereign Default Risk," Journal of Business & Economic Statistics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 32(2), pages 271-284, April.
  8. Xin Zhang & Bernd Schwaab & Andre Lucas, 2011. "Conditional Probabilities and Contagion Measures for Euro Area Sovereign Default Risk," Tinbergen Institute Discussion Papers, Tinbergen Institute 11-176/2/DSF29, Tinbergen Institute, revised 28 Jun 2012.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dgr:uvatin:20110078. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antoine Maartens (+31 626 - 160 892)).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.