Multiplicative Error Models (MEM) can be used to trace the dynamics of non–negative valued processes. Interactions between several such processes are accommodated by the vector MEM and estimated by maximum likelihood (Gamma marginals with copula functions) or by Generalized Method of Moments. In choosing the relevant variables one can follow an automated procedure where the full specification is successively pruned in a general–to–specific approach. An efficient and fast algorithm is presented in this paper and evaluated by means of a simulation and a real world example of volatility spillovers in European markets.
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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti" in its series Econometrics Working Papers Archive with number
wp2009_02.
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