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 theoretical 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 a maximum likelihood with the EM algorithm and Bayesian estimation with a Gibbs sampler. Finally, we apply the model to daily U.S. stock returns.
|Date of creation:||01 Feb 2006|
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- Christian M. Hafner, 2003. "Fourth Moment Structure of Multivariate GARCH Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 1(1), pages 26-54.
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- BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen, 2003. "Multivariate GARCH models: a survey," CORE Discussion Papers 2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
- Tom Doan, "undated". "RATS programs to replicate Gray's 1996 Regime Switching GARCH paper," Statistical Software Components RTZ00080, Boston College Department of Economics.
- James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2007. "Normalization in Econometrics," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 221-252.
- James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2004. "Normalization in econometrics," FRB Atlanta Working Paper 2004-13, Federal Reserve Bank of Atlanta.
- Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
- Denis Pelletier, 2004. "Regime Switching for Dynamic Correlations," Econometric Society 2004 North American Summer Meetings 230, Econometric Society.
- C. S. Wong & W. K. Li, 2000. "On a mixture autoregressive model," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 62(1), pages 95-115.
- Markus Haas, 2004. "A New Approach to Markov-Switching GARCH Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 493-530.
- Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139. Full references (including those not matched with items on IDEAS)
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