Multivariate stochastic volatility models based on non-Gaussian Ornstein-Uhlenbeck processes: A quasi-likelihood approach
AbstractThis paper extends the ordinary quasi-likelihood estimator for stochastic volatility models based on non-Gaussian Ornstein-Uhlenbeck (OU) processes to vector processes. Despite the fact that multivariate modeling of asset returns is essential for portfolio optimization and risk management -- major areas of financial analysis -- the literature on multivariate modeling of asset prices in continuous time is sparse, both with regard to theoretical and applied results. This paper uses non-Gaussian OU-processes as building blocks for multivariate models for high frequency financial data. The OU framework allows exact discrete time transition equations that can be represented on a linear state space form. We show that a computationally feasible quasi-likelihood function can be constructed by means of the Kalman filter also in the case of high-dimensional vector processes. The framework is applied to Euro/NOK and US Dollar/NOK exchange rate data for the period 2.1.1989-4.2.2010.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 614.
Date of creation: Mar 2010
Date of revision:
multivariate stochastic volatility; exchange rates; Ornstein-Uhlenbeck processes; quasi-likelihood; factor models; state space representation;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-11 (All new papers)
- NEP-ECM-2010-04-11 (Econometrics)
- NEP-ETS-2010-04-11 (Econometric Time Series)
- NEP-ORE-2010-04-11 (Operations Research)
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