Multivariate mixed normal conditional heteroskedasticity

We propose a new multivariate volatility model where the conditional distribution of a vector time series is given by a mixture of multivariate normal distributions. Each of these distributions is allowed to have a time-varying covariance matrix. The process can be globally covariance- stationary even though some components are not covariance-stationary. We derive some theo- retical properties of the model such as the unconditional covariance matrix and autocorrelations of squared returns. The complexity of the model requires a powerful estimation algorithm. In a simulation study we compare estimation by maximum likelihood with the EM algorithm and Bayesian estimation with a Gibbs sampler. Finally, we apply the model to daily U.S. stock returns.