Multivariate autoregressive conditional heteroskedasticity with smooth transitions in conditional correlations

Arbeitspapier

In this paper we propose a new multivariate GARCH model with time-varying conditional correlation structure. The approach adopted here is based on the decomposition of the covariances into correlations and standard deviations. The time-varying conditional correlations change smoothly between two extreme states of constant correlations according to an endogenous or exogenous transition variable. An LM test is derived to test the constancy of correlations and LM and Wald tests to test the hypothesis of partially constant correlations. Analytical expressions for the test statistics and the required derivatives are provided to make computations feasible. An empirical example based on daily return series of five frequently traded stocks in the Standard & Poor 500 stock index completes the paper. The model is estimated for the full five-dimensional system as well as several subsystems and the results discussed in detail.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 577

Classification and Topics

• Classification: Wirtschaft ; Hypothesis Testing: General ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Model Construction and Estimation ; Model Evaluation, Validation, and Selection ; General Financial Markets: General (includes Measurement and Data)
• Subject: Multivariate GARCH ; Constant conditional correlation ; Dynamic conditional correlation ; Return comovement ; Volatility model evaluation ; Multivariate Analyse ; ARCH-Modell ; Börsenkurs ; Volatilität

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Silvennoinen, Annastiina ; Teräsvirta, Timo
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/56262
• Last update: 10.03.2025, 11:44 AM CET