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Structured Multivariate Volatility Models

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Author Info

  • Massimiliano Caporin

    ()
    (University of Padua)

  • Paolo Paruolo

    (Università dell'Insubria)

Abstract

This paper proposes structured parametrizations for multivariate volatility models, which use spatial weight matrices induced by economic proximity. These structured specifications aim at solving the curse of dimensionality problem, which limits feasibility of model-estimation to small cross-sections for unstructured models. Structured parametrizations possess the following four desirable properties: i) they are flexible, allowing for covariance spill-over; ii) they are parsimonious, being characterized by a number of parameters that grows only linearly with the cross-section dimension; iii) model parameters have a direct economic interpretation that reflects the chosen notion of economic classification; iv) model-estimation computations are faster than for unstructured specifications. We give examples of structured specifications for multivariate GARCH models as well as for Stochastic- and Realized-Volatility models. The paper also discusses how to construct spatial weight matrices that are time-varying and possibly derived from a set of covariates.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0091.

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Length: 40 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:pad:wpaper:0091

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Related research

Keywords: MGARCH; Stochastic Volatility; Realized Volatility; Spatial models; ANOVA;

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Cited by:
  1. Massimiliano Caporin & Michael McAleer, 2009. "Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models," Documentos del Instituto Complutense de Análisis Económico 0904, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. Massimiliano Caporin & Michael McAleer, 2012. "Robust Ranking of Multivariate GARCH Models by Problem Dimension," Documentos del Instituto Complutense de Análisis Económico 2012-06, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, revised Apr 2012.
  3. Massimiliano Caporin & Michael McAleer, 2010. "Ranking Multivariate GARCH Models by Problem Dimension," CARF F-Series CARF-F-219, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  4. Caporin, Massimiliano & Jimenez-Martin, Juan-Angel & Gonzalez-Serrano, Lydia, 2013. "Currency hedging strategies, strategic benchmarks and the Global and Euro Sovereign financial crises," MPRA Paper 50940, University Library of Munich, Germany, revised 23 Oct 2013.

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