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Enforcing an Admissible Parameter Space for Vector MEM: The Fundamental Role of Matrix Inequality Constraints

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We derive an admissible parameter space for vector Multiplicative Error Models (vMEMs), explicitly formulating it in terms of the model’s matrix parameters through a set of matrix inequalities. Another key contribution is the adoption of constrained maximum likelihood estimation for the multivariate process, which ensures compliance with these matrix inequalities and addresses the limitations of unconstrained approaches used in previous studies. To demonstrate the effectiveness of the proposed method, we apply it to four empirical cases in financial volatility modeling, emphasizing its practical relevance.

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  • Karanasos, Menelaos & Xu, Yongdeng & Yfanti, Stavroula & Zopounidis, Constantin, 2026. "Enforcing an Admissible Parameter Space for Vector MEM: The Fundamental Role of Matrix Inequality Constraints," Cardiff Economics Working Papers E2026/3, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2026/3
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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