Cluster GARCH

Chen Tong, Peter Hansen and Ilya Archakov

Papers from arXiv.org

Abstract: We introduce a novel multivariate GARCH model with flexible convolution-t distributions that is applicable in high-dimensional systems. The model is called Cluster GARCH because it can accommodate cluster structures in the conditional correlation matrix and in the tail dependencies. The expressions for the log-likelihood function and its derivatives are tractable, and the latter facilitate a score-drive model for the dynamic correlation structure. We apply the Cluster GARCH model to daily returns for 100 assets and find it outperforms existing models, both in-sample and out-of-sample. Moreover, the convolution-t distribution provides a better empirical performance than the conventional multivariate t-distribution.

Date: 2024-06
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
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