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New approaches of the DCC-GARCH residual: Application to foreign exchange rates

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  • Kenichiro Shiraya
  • Kanji Suzuki
  • Tomohisa Yamakami

Abstract

Two formulations are proposed to filter out correlations in the residuals of the multivariate GARCH model. The first approach is to estimate the correlation matrix as a parameter and transform any joint distribution to have an arbitrary correlation matrix. The second approach transforms time series data into an uncorrelated residual based on the eigenvalue decomposition of a correlation matrix. The empirical performance of these methods is examined through a prediction task for foreign exchange rates and compared with other methodologies in terms of the out-of-sample likelihood. By using these approaches, the DCC-GARCH residual can be almost independent.

Suggested Citation

  • Kenichiro Shiraya & Kanji Suzuki & Tomohisa Yamakami, 2024. "New approaches of the DCC-GARCH residual: Application to foreign exchange rates," Papers 2411.08246, arXiv.org.
    • Handle: RePEc:arx:papers:2411.08246
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    References listed on IDEAS

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