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A General Multivariate Threshold GARCH Model With Dynamic Conditional Correlations

  • Audrino, Francesco
  • Trojani, Fabio

We propose a new multivariate DCC-GARCH model that extends existing approaches by admitting multivariate thresholds in conditional volatilities and conditional correlations. Model estimation is numerically feasible in large dimensions and positive semi-definiteness of conditional covariance matrices is naturally ensured by the pure model structure. Conditional thresholds in volatilities and correlations are estimated from the data, together with all other model parameters. We study the performance of our approach in some Monte Carlo simulations, where it is shown that the model is able to fit correctly a GARCH-type dynamics and a complex threshold structure in conditional volatilities and correlations of simulated data. In a real data application to international equity markets, we observe estimated conditional volatilities that are strongly influenced by GARCH-type and multivariate threshold effects. Conditional correlations, instead, are determined by simple threshold structures where no GARCH-type effect could be identified.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 29 (2011)
Issue (Month): 1 ()
Pages: 138-149

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Handle: RePEc:bes:jnlbes:v:29:i:1:y:2011:p:138-149
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  1. Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
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