Hierarchical hidden Markov structure for dynamic correlations: the hierarchical RSDC model
AbstractThis paper presents a new multivariate GARCH model with time-varying conditional correlation structure which is a generalization of the Regime Switching Dynamic Correlation (RSDC) of Pelletier (2006). This model, which we name Hierarchical RSDC, is building with the hierarchical generalization of the hidden Markov model introduced by Fine et al. (1998). This can be viewed graphically as a tree-structure with different types of states. The first are called production states and they can emit observations, as in the classical Markov-Switching approach. The second are called abstract states. They can't emit observations but establish vertical and horizontal probabilities that define the dynamic of the hidden hierarchical structure. The main gain of this approach compared to the classical Markov-Switching model is to increase the granularity of the regimes. Our model is also compared to the new Double Smooth Transition Conditional Correlation GARCH model (DSTCC), a STAR approach for dynamic correlations proposed by Silvennoinen and Teräsvirta (2007). The reason is that under certain assumptions, the DSTCC and our model represent two classical competing approaches to modeling regime switching. We also perform Monte-Carlo simulations and we apply the model to two empirical applications studying the conditional correlations of selected stock returns. Results show that the Hierarchical RSDC provides a good measure of the correlations and also has an interesting explanatory power.
Download InfoIf 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.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00285866.
Date of creation: 06 Jun 2008
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00285866/en/
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
Multivariate GARCH; Dynamic correlations; Regime switching; Markov chain; Hidden Markov models; Hierarchical Hidden Markov models;
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral 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: (CCSD).
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.