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Modelling Volatilities and Conditional Correlations in Futures Markets with a Multivariate t Distribution

  • Pesaran, B.
  • Pesaran, M.H.

This paper considers a multivariate t version of the Gaussian dynamic conditional correlation (DCC) model proposed by Engle (2002), and suggests the use of devolatized returns computed as returns standardized by realized volatilities rather than by GARCH type volatility estimates. The t-DCC estimation procedure is applied to a portfolio of daily returns on currency futures, government bonds and equity index futures. The results strongly reject the normal-DCC model in favour of a t-DCC specification. The t-DCC model also passes a number of VaR diagnostic tests over an evaluation sample. The estimation results suggest a general trend towards a lower level of return volatility, accompanied by a rising trend in conditional cross correlations in most markets; possibly reflecting the advent of euro in 1999 and increased interdependence of financial markets.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0734.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0734.

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Length: 29
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:cam:camdae:0734
Note: Ec
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Jose A. Lopez, 1998. "Methods for evaluating value-at-risk estimates," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 119-124.
  2. Bauwens, Luc & Laurent, Sebastien, 2005. "A New Class of Multivariate Skew Densities, With Application to Generalized Autoregressive Conditional Heteroscedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 346-354, July.
  3. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  4. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, . "Multivariate GARCH models: a survey," CORE Discussion Papers RP 1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Pesaran, M Hashem & Timmermann, Allan G, 2004. "Real Time Econometrics," CEPR Discussion Papers 4402, C.E.P.R. Discussion Papers.
  6. Pesaran, M Hashem & Zaffaroni, Paolo, 2005. "Model Averaging and Value-at-Risk Based Evaluation of Large Multi-Asset Volatility Models for Risk Management," CEPR Discussion Papers 5279, C.E.P.R. Discussion Papers.
  7. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
  8. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  9. Fiorentini, Gabriele & Sentana, Enrique & Calzolari, Giorgio, 2003. "Maximum Likelihood Estimation and Inference in Multivariate Conditionally Heteroscedastic Dynamic Regression Models with Student t Innovations," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(4), pages 532-46, October.
  10. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  11. Sentana, E., 1994. "The Likelihood Function of a Conditionally Heteroskdastic Factor Model with Heywood Cases," Papers 9420, Centro de Estudios Monetarios Y Financieros-.
  12. Engle, Robert F & Manganelli, Simone, 1999. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," University of California at San Diego, Economics Working Paper Series qt06m3d6nv, Department of Economics, UC San Diego.
  13. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
  14. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
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