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Volatility impulse response functions for multivariate GARCH models

  • HAFNER, Christian M.

    ()

    (Institut fur Statistik und Okonometrie, Wirtschaftswissenschaftliche Fakultat, Humboldt-Universitat zu Berlin, and CORE, Université catholique de Louvain)

  • HERWARTZ, Helmut

    ()

    (Institut fur Statistik und Okonometrie, Wirtschaftswissenschaftliche Fakultat, Humboldt-Universitat zu Berlin)

In the empirical analysis of financial time series, multivariate GARCH models have been used in various forms.In most cases it is not well understood how the use of a restricted model has to be paid with loss of valuable information. We investigate the structural implications of two alternative models for the response of the conditional (co-)variances to independent shocks. The impulse response analysis, adopted to volatility models, appears to be a convenient methodology to obtain information on the interaction of financial series. We define volatility impulse response functions and provide an empirical analysis for a bivariate exchange rate series. For the analyzed series, the impulse response function of the correlation reveals strong discrepancies between the estimated diagonal and BEKK models. This indicates that the diagonality restriction may hide important structural properties of the series.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1998047.

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Date of creation: 01 Aug 1998
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Handle: RePEc:cor:louvco:1998047
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  1. Bollerslev, Tim & Engle, Robert F, 1993. "Common Persistence in Conditional Variances," Econometrica, Econometric Society, vol. 61(1), pages 167-86, January.
  2. Nelson, Daniel B., 1990. "Stationarity and Persistence in the GARCH(1,1) Model," Econometric Theory, Cambridge University Press, vol. 6(03), pages 318-334, September.
  3. Christian M. Hafner & Helmut Herwartz, 2000. "Testing for linear autoregressive dynamics under heteroskedasticity," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 177-197.
  4. Lin, Wen-Ling, 1997. "Impulse Response Function for Conditional Volatility in GARCH Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 15-25, January.
  5. Andrew K. Rose & Lars E.O. Svensson, 1993. "European Exchange Rate Credibility Before the Fall," NBER Working Papers 4495, National Bureau of Economic Research, Inc.
  6. Drost, F.C. & Nijman, T.E., 1992. "Temporal aggregation of GARCH processes," Discussion Paper 1992-40, Tilburg University, Center for Economic Research.
  7. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  8. Drost, F.C. & Nijman, T.E., 1993. "Temporal aggregation of GARCH processes," Other publications TiSEM 0642fb61-c7f4-4281-b484-4, Tilburg University, School of Economics and Management.
  9. John Freebairn & Bill Griffiths, 2006. "Introduction," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages S1-S1, 09.
  10. BAUWENS, LUC & LUBRANO, Michel, 1997. "Bayesian option pricing using asymmetric GARCH," CORE Discussion Papers 1997059, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  12. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  13. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  14. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  15. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
  16. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  17. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
  18. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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