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Positivity Constraints on the Conditional Variances in the Family of Conditional Correlation GARCH Models

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Author Info
Nakatani, Tomoaki () (Dept. of Economic Statistics, Stockholm School of Economics)
Teräsvirta, Timo () (CREATES, School of Economics and Management, University of Aarhus)

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Abstract

In this article, we derive a set of necessary and sufficient conditions for positivity of the vector conditional variance equation in multivariate GARCH models with explicit modelling of conditional correlation. These models include the constant conditional correlation GARCH model of Bollerslev (1990) and its extensions. Under the new conditions, it is possible to introduce negative volatility spillovers in the model. An empirical example illustrates usefulness of having such conditions in practice.

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Publisher Info
Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 675.

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Length: 10 pages
Date of creation: 15 Oct 2007
Date of revision: 15 Nov 1007
Publication status: Published in Finance Research Letters, 2008, pages 88-95.
Handle: RePEc:hhs:hastef:0675

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Related research
Keywords: Multivariate GARCH; positivity constraints; conditional correlation;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
G19 - Financial Economics - - General Financial Markets - - - Other

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  1. Christian Conrad & Menelaos Karanasos, 2008. "Modeling Volatility Spillovers between the Variabilities of US Inflation and Output: the UECCC GARCH Model," Working Papers 0475, University of Heidelberg, Department of Economics, revised Sep 2008. [Downloadable!]
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