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Multivariate stochastic volatility with co-heteroscedasticity

Joshua Chan, Arnaud Doucet, Roberto Leon-Gonzalez () and Rodney Strachan ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper develops a new methodology that decomposes shocks into homoscedastic and heteroscedastic components. This specification implies there exist linear combinations of heteroscedastic variables that eliminate heteroscedasticity. That is, these linear combinations are homoscedastic; a property we call co-heteroscedasticity. The heteroscedastic part of the model uses a multivariate stochastic volatility inverse Wishart process. The resulting model is invariant to the ordering of the variables, which we show is important for impulse response analysis but is generally important for, e.g., volatility estimation and variance decompositions. The specification allows estimation in moderately high-dimensions. The computational strategy uses a novel particle filter algorithm, a reparameterization that substantially improves algorithmic convergence and an alternating-order particle Gibbs that reduces the amount of particles needed for accurate estimation. We provide two empirical applications; one to exchange rate data and another to a large Vector Autoregression (VAR) of US macroeconomic variables. We find strong evidence for co-heteroscedasticity and, in the second application, estimate the impact of monetary policy on the homoscedastic and heteroscedastic components of macroeconomic variables.

Keywords: Markov Chain Monte Carlo; Gibbs Sampling; Flexible Parametric Model; Particle Filter; Co-heteroscedasticity; state-space; reparameterization; alternating-order (search for similar items in EconPapers)
JEL-codes: C11 C15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-ore and nep-rmg
Date: 2018-10
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Related works:
Working Paper: Multivariate Stochastic Volatility with Co-Heteroscedasticity (2018) Downloads
Working Paper: Multivariate Stochastic Volatility with Co-Heteroscedasticity (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2018-52

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