Multivariate Stochastic Volatility Models with Correlated Errors
We develop a Bayesian approach for parsimoniously estimating the correlation structure of the errors in a multivariate stochastic volatility model. Since the number of parameters in the joint correlation matrix of the return and volatility errors is potentially very large, we impose a prior that allows the off-diagonal elements of the inverse of the correlation matrix to be identically zero. The model is estimated using a Markov chain simulation method that samples from the posterior distribution of the volatilities and parameters. We illustrate the approach using both simulated and real examples. In the real examples, the method is applied to equities at three levels of aggregation: returns for firms within the same industry, returns for different industries, and returns aggregated at the index level. We find pronounced correlation effects only at the highest level of aggregation.
Volume (Year): 25 (2006)
Issue (Month): 2-3 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/LECR20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/LECR20|
When requesting a correction, please mention this item's handle: RePEc:taf:emetrv:v:25:y:2006:i:2-3:p:245-274. 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: ()
If references are entirely missing, you can add them using this form.