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A Multivariate GARCH Model with Time-Varying Correlations

Y. K. Tse () and Albert Tsui ()

No 250, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: In this paper we propose a new multivariate GARCH model with time-varying correlations. We adopt the vech representation based on the conditional variances and the conditional correlations. While each conditional-variance term is assumed to follow a univariate GARCH formulation, the conditional-correlation matrix is postulated to follow an autoregressive moving average type of analogue. By imposing some suitable restrictions on the conditional-correlation-matrix equation, we manage to construct a MGARCH model in which the conditional-correlation matrix is guaranteed to be positive definite during the optimisation. Thus, our new model retains the intuition and interpretation of the univariate GARCH model and yet satisfies the positive-definite condition as found in the constant-correlation and BEKK models. We report some Monte Carlo results on the finite-sample distributions of the QMLE of the varying-correlation MGARCH model. The new model is applied to some real data sets. It is found that extending the constant-correlation model to allow for time-varying correlations provides some interesting time histories that are not available in a constant-correlation model.

Date: 2000-08-01
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Working Paper: A Multivariate GARCH Model with Time-Varying Correlations (2000) Downloads
Working Paper: A Multivariate GARCH Model with Time-Varying correlations (2000) Downloads
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