New approaches of the DCC-GARCH residual: Application to foreign exchange rates

Kenichiro Shiraya, Kanji Suzuki and Tomohisa Yamakami

Papers from arXiv.org

Abstract: Two formulations are proposed to filter out correlations in the residuals of the multivariate GARCH model. The first approach is to estimate the correlation matrix as a parameter and transform any joint distribution to have an arbitrary correlation matrix. The second approach transforms time series data into an uncorrelated residual based on the eigenvalue decomposition of a correlation matrix. The empirical performance of these methods is examined through a prediction task for foreign exchange rates and compared with other methodologies in terms of the out-of-sample likelihood. By using these approaches, the DCC-GARCH residual can be almost independent.

Date: 2024-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mon
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