A general multivariate threshold GARCH model with dynamic conditional correlations

Francesco Audrino and Fabio Trojani ()

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: We propose a new multivariate GARCH model with Dynamic Conditional Correlations that extends previous models by admitting multivariate thresholds in conditional volatilities and correlations. The model estimation is feasible in large dimensions and the positive deniteness of the conditional covariance matrix is easily ensured by the structure of the model. Thresholds in conditional volatilities and correlations are estimated from the data, together with all other model parameters. We study the performance of our model in three distinct applications to US stock and bond market data. Even if the conditional volatility functions of stock returns exhibit pronounced GARCH and threshold features, their conditional correlation dynamics depends on a very simple threshold structure with no local GARCH features. We obtain a similar result for the conditional correlations between government and corporate bond returns. On the contrary, we ¯nd both threshold and GARCH structures in the conditional correlations between stock and government bond returns. In all applications, our model improves signi¯cantly the in-sample and out-of-sample forecasting power for future conditional correlations with respect to other relevant multivariate GARCH models.

Keywords: Multivariate GARCH models; Dynamic conditional correlations; Tree-structured GARCH models (search for similar items in EconPapers)
JEL-codes: C12 C13 C51 C53 C61 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-04
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: A General Multivariate Threshold GARCH Model With Dynamic Conditional Correlations (2011)
Journal Article: A General Multivariate Threshold GARCH Model With Dynamic Conditional Correlations (2011)
Working Paper: A general multivariate threshold GARCH model with dynamic conditional correlations (2005)
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