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Wake me up before you GO-GARCH

  • Roy van der Weide

"The `holy grail' in multivariate GARCH modelling is without any doubt a parameterization of the covariance matrix that is feasible in terms of estimation at a minimum loss of generality" (van der Weide, 2002). Recent models that aspire such favourable position in this trade-off are the DCC model by Engle (2002) and the GO-GARCH model by van der Weide (2002). These models have gained generality on the earliest models designed to be feasible, CCC and O-GARCH, without losing too much of their practical attractiveness. Generality may be measured by the ability to model the key stylized facts of multivariate data:(i) Persistence in volatility and covariation; (ii) Time-varying correlation; and (iii) Spill-over effects in volatility. The DCC model incorporates the first two items, but trades the third for particular ease of estimation. On the other hand, GO-GARCH which is nested in the general BEKK model meets all three key aspects of empirical data, while it may seem to give in a little on DCC in terms of practicability. This paper proposes an alternative method of estimating GO-GARCH that will substantially increase feasibility while preserving generality. In effect, the approach does not become more complicated than estimating a Vector Autoregressive Model along the way. As the procedure may easily be implemented in any popular software package, such as EViews, it should meet the convenience of DCC

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 316.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:316
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  1. Lanne, Markku & Saikkonen, Pentti, 2007. "A Multivariate Generalized Orthogonal Factor GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 61-75, January.
  2. I. D. Vrontos & P. Dellaportas & D. N. Politis, 2003. "A full-factor multivariate GARCH model," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 312-334, December.
  3. Luc Bauwens & Sébastien Laurent, 2002. "A New Class of Multivariate skew Densities, with Application to GARCH Models," Computing in Economics and Finance 2002 5, Society for Computational Economics.
  4. Roy van der Weide, 2002. "GO-GARCH: a multivariate generalized orthogonal GARCH model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 549-564.
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