A general multivariate threshold GARCH model with dynamic conditional correlations

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A general multivariate threshold GARCH model with dynamic conditional correlations

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Francesco Audrino ()
Fabio Trojani ()

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Abstract

We propose a new multivariate GARCH model with Dynamic Conditional Correlations that extends previous models by admitting multivariate thresholds in conditional volatilities and correlations. The model estimation is feasible in large dimensions and the positive deniteness of the conditional covariance matrix is easily ensured by the structure of the model. Thresholds in conditional volatilities and correlations are estimated from the data, together with all other model parameters. We study the performance of our model in three distinct applications to US stock and bond market data. Even if the conditional volatility functions of stock returns exhibit pronounced GARCH and threshold features, their conditional correlation dynamics depends on a very simple threshold structure with no local GARCH features. We obtain a similar result for the conditional correlations between government and corporate bond returns. On the contrary, we ¯nd both threshold and GARCH structures in the conditional correlations between stock and government bond returns. In all applications, our model improves signi¯cantly the in-sample and out-of-sample forecasting power for future conditional correlations with respect to other relevant multivariate GARCH models.

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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2007 with number 2007-25.

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Length: 34 pages
Date of creation: Apr 2007
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Handle: RePEc:usg:dp2007:2007-25

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Paper
- Fabio Trojani & Francesco Audrino, 2005. "A general multivariate threshold GARCH model with dynamic conditional correlations," University of St. Gallen Department of Economics working paper series 2005 2005-04, Department of Economics, University of St. Gallen. [Downloadable!]

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-07-20 (All new papers)
NEP-ECM-2007-07-20 (Econometrics)
NEP-ETS-2007-07-20 (Econometric Time Series)
NEP-FOR-2007-07-20 (Forecasting)
NEP-RMG-2007-07-20 (Risk Management)

References listed on IDEAS
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Full references

Cited by:
(explanations, 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.)

Fulvio Corsi & Francesco Audrino, 2008. "Modeling Tick-by-Tick Realized Correlations," University of St. Gallen Department of Economics working paper series 2008 2008-05, Department of Economics, University of St. Gallen. [Downloadable!]

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