Multiplicative Error Models

Christian Brownlees, Fabrizio Cipollini () and Giampiero Gallo ()

No 2011_03, Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"

Abstract: Financial time series analysis has focused on data related to market trading activity. Next to the modeling of the conditional variance of returns within the GARCH family of models, recent attention has been devoted to other variables: first, and foremost, volatility measured on the basis of ultra-high frequency data, but also volumes, number of trades, durations. In this paper, we examine a class of models, named Multiplicative Error Models, which are particularly suited to model such non-negative time series. We discuss the univariate specification, by considering the base choices for the conditional expectation and the error term. We provide also a general framework, allowing for richer specifications of the conditional mean. The outcome is a novel MEM (called Composite MEM) which is reminiscent of the short- and long-run component GARCH model by Engle and Lee (1999). Inference issues are discussed relative to Maximum Likelihood and Generalized Method of Moments estimation. In the application, we show the regularity in parameter estimates and forecasting performance obtainable by applying the MEM to the realized kernel volatility of components of the S&P100 index. We suggest extensions of the base model by enlarging the information set and adopting a multivariate specification.

Keywords: Multiplicative Error Models; Realized Volatility; Financial Time Series; Composite MEM (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 C58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011-02, Revised 2011-04
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Forthcoming in 'Volatility Models and Their Applications' (Luc Bauwens, Christian Hafner, Sebastien Laurent eds.)

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Persistent link: https://EconPapers.repec.org/RePEc:fir:econom:wp2011_03

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