A Vector Multiplicative Error Model with Spillover Effects and Co-movements

E. Otranto ()

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: Modern approaches to financial time series aim to model in a multivariate framework the volatility of different indices or assets, which could influence each other, creating spillover effects. Furthermore, the integration of financial markets provides a similar dynamics (co-movement). We propose a new model for volatility vectors, belonging to the family of Multiplicative Error Models, which incorporates spillover and co-movement effects. By adopting an appropriate parameterization, it is possible to estimate this model even for high dimensional vectors of volatility. To reduce the number of unknown coefficients, we propose a 3-step model-based clustering procedure. The proposed model is applied to a set of seventeen world financial indices, providing a useful interpretation of spillover effects and co- movements. Furthermore, the proposed parameterization is compared with two alternatives, showing significantly better performance.

Keywords: vector of volatility; multiplicative factors; model-based clustering; high-low range; high-dimensional time series (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202404

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