Enforcing an Admissible Parameter Space for Vector MEM: The Fundamental Role of Matrix Inequality Constraints

Menelaos Karanasos, Yongdeng Xu, Stavroula Yfanti and Constantin Zopounidis
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Stavroula Yfanti: Queen Mary University of London, UK, https://www.qmul.ac.uk/sbm/staff/academic/profiles/yfantis.html
Constantin Zopounidis: Technical University of Crete, Greece, https://www.pem.tuc.gr/en/people/faculty/constantin-zopounidis

No E2026/3, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We derive an admissible parameter space for vector Multiplicative Error Models (vMEMs), explicitly formulating it in terms of the model’s matrix parameters through a set of matrix inequalities. Another key contribution is the adoption of constrained maximum likelihood estimation for the multivariate process, which ensures compliance with these matrix inequalities and addresses the limitations of unconstrained approaches used in previous studies. To demonstrate the effectiveness of the proposed method, we apply it to four empirical cases in financial volatility modeling, emphasizing its practical relevance.

Keywords: Admissible Parameter Space; Constrained Maximum Likelihood Estimation; Matrix Inequalities; MEM; Multivariate Volatility Modeling; Second Moment Structure (search for similar items in EconPapers)
JEL-codes: C32 C53 C58 G15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2026-03
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