Copula-MGARCH with continuous covariance decomposition

Helmut Herwartz and Fabian H.C. Raters

Economics Letters, 2015, vol. 133, issue C, 73-76

Abstract: The Copula-MGARCH (C-MGARCH) model by Lee and Long (2009) incorporates standardized copula distributed innovations in MGARCH models. We motivate an extension of the C-MGARCH model by means of a continuous decomposition of the innovations’ covariance matrix. An extended BEKK(1, 1) model with rotated standardized innovations is outlined for the bivariate case. The model parameters and the rotation angle are jointly estimated by means of Maximum Likelihood. We conduct an application to the log-differences of Euro/US-Dollar and Japanese Yen/US-Dollar daily exchange rates. In-sample information criteria and ex-ante portfolio Value-at-Risk coverage tests show that the enhanced flexibility of the rotated C-MGARCH is supported by the data.

Keywords: Copula; MGARCH; Covariance decomposition; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C32 C52 C58 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:133:y:2015:i:c:p:73-76

DOI: 10.1016/j.econlet.2015.05.023

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