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Copula--based Specification of vector MEMs

Fabrizio Cipollini (), Robert Engle and Giampiero Gallo ()

No 2016_04, Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"

Abstract: The Multiplicative Error Model (Engle (2002)) for nonnegative valued processes is specified as the product of a (conditionally autoregressive) scale factor and an innovation process with nonnegative support. A multivariate extension allows for the innovations to be contemporaneously correlated. We overcome the lack of sufficiently flexible probability density functions for such processes by suggesting a copula function approach to estimate the parameters of the scale factors and of the correlations of the innovation processes. We illustrate this vector MEM with an application to the interactions between realized volatility, volume and the number of trades. We show that significantly superior realized volatility forecasts are delivered in the presence of other trading activity indicators and contemporaneous correlations.

Keywords: GARCH; MEM; Realized Volatility; Trading Volume; Trading Activity; Copula; Volatility Forecasting. (search for similar items in EconPapers)
JEL-codes: C32 C58 C53 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets
Date: 2016-04
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