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Copula-based vMEM Specifications versus Alternatives: The Case of Trading Activity

We discuss several multivariate extensions of the Multiplicative Error Model by Engle (2002) to take into account dynamic interdependence and contemporaneously correlated innovations (vector MEM or vMEM). We suggest copula functions to link Gamma marginals of the innovations, in a specification where past values and conditional expectations of the variables can be simultaneously estimated. Results with realized volatility, volumes and number of trades of the JNJ stock show that significantly superior realized volatility forecasts are delivered with a fully interdependent vMEM relative to a single equation. Alternatives involving log–Normal or semiparametric formulations produce substantially equivalent results.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" in its series Econometrics Working Papers Archive with number 2017_02.

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Length: 29 pages
Date of creation: Apr 2017
Handle: RePEc:fir:econom:wp2017_02
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