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Identifying structural shocks to volatility through a proxy-MGARCH model

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  • Fengler, Matthias
  • Polivka, Jeannine

Abstract

We extend the classical MGARCH specification for volatility modeling by developing a structural MGARCH model targeting identification of shocks and volatility spillovers in a speculative return system. Similarly to the proxy-sVAR framework, we work with auxiliary proxy variables constructed from news-related measures to identify the underlying shock system. We achieve full identification with multiple proxies by chaining Givens rotations. In an empirical application, we identify an equity, bond and currency shock. We study the volatility spillovers implied by these labelled structural shocks. Our analysis shows that symmetric spillover regimes are rejected.

Suggested Citation

  • Fengler, Matthias & Polivka, Jeannine, 2021. "Identifying structural shocks to volatility through a proxy-MGARCH model," Economics Working Paper Series 2103, University of St. Gallen, School of Economics and Political Science, revised May 2021.
  • Handle: RePEc:usg:econwp:2021:03
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    References listed on IDEAS

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    More about this item

    Keywords

    Givens rotations; identification; news-based measures; proxy-MGARCH; shock labelling; structural innovations; volatility spillovers;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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