Modeling Time-Varying Dependencies between Positive-Valued High-Frequency Time Series
AbstractMultiplicative error models (MEM) became a standard tool for modeling conditional durations of intraday transactions, realized volatilities and trading volumes. The parametric estimation of the corresponding multivariate model, the so-called vector MEM (VMEM), requires a specification of the joint error term distribution, which is due to the lack of multivariate distribution functions on Rd + defined via a copula. Maximum likelihood estimation is based on the assumption of constant copula parameters and therefore, leads to invalid inference, if the dependence exhibits time variations or structural breaks. Hence, we suggest to test for time-varying dependence by calibrating a time-varying copula model and to reestimate the VMEM based on identified intervals of homogenous dependence. This paper summarizes the important aspects of (V)MEM, its estimation and a sequential test for changes in the dependence structure. The techniques are applied in an empirical example.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2012-054.
Length: 12 pages
Date of creation: Sep 2012
Date of revision:
vector multiplicative error model; copula; time-varying copula; highfrequency data;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-17 (All new papers)
- NEP-ECM-2012-11-17 (Econometrics)
- NEP-ETS-2012-11-17 (Econometric Time Series)
- NEP-MST-2012-11-17 (Market Microstructure)
- NEP-ORE-2012-11-17 (Operations Research)
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