Advanced Search
MyIDEAS: Login

Fitting vast dimensional time-varying covariance models

Contents:

Author Info

  • Robert Engle

    ()

  • Neil Shephard

    ()

  • Kevin Shepphard

    ()

Abstract

Building models for high dimensional portfolios is important in risk management and asset allocation. Here we propose a novel and fast way of estimating models of time-varying covariances that overcome an undiagnosed incidental parameter problem which has troubled existing methods when applied to hundreds or even thousands of assets. Indeed we can handle the case where the cross-sectional dimension is larger than the time series one. The theory of this new strategy is developed in some detail, allowing formal hypothesis testing to be carried out on these models. Simulations are used to explore the performance of this inference strategy while empirical examples are reported which show the strength of this method. The out of sample hedging performance of various models estimated using this method are compared.

Download Info

If 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.
File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2008fe30.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Maxine Collett)
Download Restriction: no

Bibliographic Info

Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe30.

as in new window
Length: 39
Date of creation: 2008
Date of revision:
Handle: RePEc:sbs:wpsefe:2008fe30

Contact details of provider:
Email:
Web page: http://www.finance.ox.ac.uk
More information through EDIRC

Related research

Keywords: ARCH models; composite likelihood; dynamic conditional correlations; incidental parameters; quasi-likelihood; time-varying covariances.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Goncalves, Silvia & White, Halbert, 2004. "Maximum likelihood and the bootstrap for nonlinear dynamic models," Journal of Econometrics, Elsevier, vol. 119(1), pages 199-219, March.
  2. Cristiano Varin, 2008. "On composite marginal likelihoods," AStA Advances in Statistical Analysis, Springer, vol. 92(1), pages 1-28, February.
  3. Olivier Ledoit & Pedro Santa-Clara & Michael Wolf, 2003. "Flexible Multivariate GARCH Modeling with an Application to International Stock Markets," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 735-747, August.
  4. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  5. K. Jöreskog, 1967. "Some contributions to maximum likelihood factor analysis," Psychometrika, Springer, vol. 32(4), pages 443-482, December.
  6. M. Hashem Pesaran & Bahram Pesaran, 2007. "Volatilities and Conditional Correlations in Futures Markets with a Multivariate t Distribution," CESifo Working Paper Series 2056, CESifo Group Munich.
  7. Tse, Y. K., 2000. "A test for constant correlations in a multivariate GARCH model," Journal of Econometrics, Elsevier, vol. 98(1), pages 107-127, September.
  8. Raffaella Giacomini & Halbert White, 2003. "Tests of conditional predictive ability," Boston College Working Papers in Economics 572, Boston College Department of Economics.
  9. Annastiina Silvennoinen & Timo Teräsvirta, 2008. "Multivariate GARCH models," CREATES Research Papers 2008-06, School of Economics and Management, University of Aarhus.
  10. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  11. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  12. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  13. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  14. de Leon, A.R., 2005. "Pairwise likelihood approach to grouped continuous model and its extension," Statistics & Probability Letters, Elsevier, vol. 75(1), pages 49-57, November.
  15. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
  16. N. Sartori, 2003. "Modified profile likelihoods in models with stratum nuisance parameters," Biometrika, Biometrika Trust, vol. 90(3), pages 533-549, September.
  17. Gabriele Fiorentini & Enrique Sentana & Neil Shephard, 2002. "Likelihood-based estimation of latent generalised ARCH structures," Economics Papers 2002-W19, Economics Group, Nuffield College, University of Oxford.
  18. Neil Shephard & Siddhartha Chib, 1999. "Analysis of High Dimensional Multivariate Stochastic Volatility Models," Economics Series Working Papers 1999-W18, University of Oxford, Department of Economics.
  19. Xiaohong Chen & David T. Jacho-Chávez & Oliver Linton, 2009. "An Alternative Way of ComputingEfficient Instrumental VariableEstimators," STICERD - Econometrics Paper Series /2009/536, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  20. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar..
  21. 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 qt5s2218dp, Department of Economics, UC San Diego.
  22. Kuk, Anthony Y. C. & Nott, David J., 2000. "A pairwise likelihood approach to analyzing correlated binary data," Statistics & Probability Letters, Elsevier, vol. 47(4), pages 329-335, May.
  23. Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sbs:wpsefe:2008fe30. See general 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: (Maxine Collett).

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.