On the Correlations in Linearized Multivariate Stochastic Volatility Models

Karim Moussa
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Karim Moussa: Vrije Universiteit Amsterdam and Tinbergen Institute

No 25-021/V, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In the analysis of multivariate stochastic volatility models, many estimation procedures begin by transforming the data, taking the logarithm of the squared returns to obtain a linear state space model. A well-known series representation links the correlations between elements of the observation error in the actual and linearized forms of the model. This note derives a closed-form expression for the series and discusses its statistical implications. Additionally, it offers a new interpretation of the correlations in the linearized model.

Date: 2025-03-21
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