Multivariate Normal Mixture GARCH

Markus Haas (), Stefan Mittnik and Marc S. Paolella
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Stefan Mittnik: Institute of Statistics, University of Munich, Center for Financial Studies, Frankfurt, and Ifo Institute for Economic Research, Munich
Marc S. Paolella: Swiss Banking Institute, University of Zurich

No 2006/09, CFS Working Paper Series from Center for Financial Studies

Abstract: We present a multivariate generalization of the mixed normal GARCH model proposed in Haas, Mittnik, and Paolella (2004a). Issues of parametrization and estimation are discussed. We derive conditions for covariance stationarity and the existence of the fourth moment, and provide expressions for the dynamic correlation structure of the process. These results are also applicable to the single-component multivariate GARCH(p, q) model and simplify the results existing in the literature. In an application to stock returns, we show that the disaggregation of the conditional (co)variance process generated by our model provides substantial intuition, and we highlight a number of findings with potential significance for portfolio selection and further financial applications, such as regime-dependent correlation structures and leverage effects.

Keywords: Conditional Volatility; Regime-dependent Correlations; Leverage Effect; Multivariate GARCH; Second-order Dependence (search for similar items in EconPapers)
JEL-codes: C32 C51 G10 G11 (search for similar items in EconPapers)
Date: 2006-04-20
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