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A Multivariate GARCH Model with Time-Varying correlations

Author Info

Listed author(s):
  • Y. K. Tse

    (National University of Singapore)

  • Albert K. C. Tsui

    (National University of Singapore)

Abstract

In this paper we propose a new multivariate GARCH model with time- varying correlations. We adopt the vech representation based on the conditional variances and the conditional correlations. While each conditional-variance term is assumed to follow a univariate GARCH formulation, the conditional-correlation matrix is postulated to follow an autoregressive moving average type of analogue. By imposing some suitable restrictions on the conditional-correlation-matrix equation, we construct a MGARCH model in which the conditional-correlation matrix is guaranteed to be positive definite during the optimisation. Thus, our new model retains the intuition and interpretation of the univariate GARCH model and yet satisfies the positive-definite condition as found in the constant-correlation and BEKK models. We report some Monte Carlo results on the finite-sample distributions of the MLE of the varying- correlation MGARCH model. The new model is applied to some real data sets. It is found that extending the constant-correlation model to allow for time-varying correlations provides some interesting time histories that are not available in a constant-correlation model.

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File URL: http://econwpa.repec.org/eps/em/papers/0004/0004010.pdf
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Paper provided by EconWPA in its series Econometrics with number 0004010.

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Length: 30 pages
Date of creation: 18 Nov 2000
Handle: RePEc:wpa:wuwpem:0004010
Note: Type of Document - PDF; prepared on PC; to print on Postscript; pages: 30; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

Keywords: BEKK model; constant correlation; Monte Carlo method; multivariate GARCH model; maximum likelihood estimate; varying correlation;

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Find related papers by JEL classification:
  • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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  12. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
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  19. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
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