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Multivariate Rotated ARCH Models

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  • Diaa Noureldin

    ()
    (Dept of Economics and Oxford-Man Institute of Quantitative Finance, University of Oxford)

  • Neil Shephard

    ()
    (Dept of Economics and Oxford-Man Institute of Quantitative Finance, University of Oxford.)

  • Kevin Sheppard

    ()
    (Dept of Economics and Oxford-Man Institute of Quantitative Finance, University of Oxford.)

Abstract

This paper introduces a new class of multivariate volatility models which is easy to estimate using covariance targeting, even with rich dynamics. We call them rotated ARCH (RARCH) models. The basic structure is to rotate the returns and then to ?t them using a BEKK-type parameterization of the time-varying covariance whose long-run covariance is the identity matrix. The extension to DCC-type parameterizations is given, introducing the rotated conditional correlation (RCC) model. Inference for these models is computationally attractive, and the asymptotics are standard. The techniques are illustrated using data on some DJIA stocks.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/covtar_bekk_v3.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2012-W01.

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Length: 34 pages
Date of creation: 18 Feb 2012
Date of revision:
Handle: RePEc:nuf:econwp:1201

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Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: RARCH; RCC; multivariate volatility; covariance targeting; common persistence; empirical Bayes; predictive likelihood.;

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  1. Neil Shephard & Kevin Sheppard, 2009. "Nuisance parameters, composite likelihoods and a panel of GARCH models," Economics Series Working Papers, University of Oxford, Department of Economics 458, University of Oxford, Department of Economics.
  2. 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.
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  4. Diaa Noureldin & Neil Shephard & Kevin Sheppard, 2011. "Multivariate High-Frequency-Based Volatility (HEAVY) Models," Economics Series Working Papers, University of Oxford, Department of Economics 533, University of Oxford, Department of Economics.
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  12. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt5s2218dp, Department of Economics, UC San Diego.
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Cited by:
  1. Matteo Barigozzi & Christian T. Brownlees & Giampiero M. Gallo & David Veredas, 2014. "Disentangling Systematic and Idiosyncratic Dynamics in Panels of Volatility Measures," Econometrics Working Papers Archive, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" 2014_02, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Feb 2014.

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