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Copula--based Specification of vector MEMs

Listed author(s):
  • Fabrizio Cipollini
  • Robert F. Engle
  • Giampiero M. Gallo

The Multiplicative Error Model (Engle (2002)) for nonnegative valued processes is specified as the product of a (conditionally autoregressive) scale factor and an innovation process with nonnegative support. A multivariate extension allows for the innovations to be contemporaneously correlated. We overcome the lack of sufficiently flexible probability density functions for such processes by suggesting a copula function approach to estimate the parameters of the scale factors and of the correlations of the innovation processes. We illustrate this vector MEM with an application to the interactions between realized volatility, volume and the number of trades. We show that significantly superior realized volatility forecasts are delivered in the presence of other trading activity indicators and contemporaneous correlations.

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File URL: http://arxiv.org/pdf/1604.01338
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Paper provided by arXiv.org in its series Papers with number 1604.01338.

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Date of creation: Apr 2016
Handle: RePEc:arx:papers:1604.01338
Contact details of provider: Web page: http://arxiv.org/

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