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Orthogonal Transformation of Coordinates in Copula M-GARCH Models – Bayesian analysis for WIG20 spot and futures returns

Mateusz Pipień

No 151, NBP Working Papers from Narodowy Bank Polski

Abstract: We check the empirical importance of some generalisations of the conditional distribution in M-GARCH case. A copula M-GARCH model with coordinate free conditional distribution is considered, as a continuation of research concerning specification of the conditional distribution in multivariate volatility models, see Pipień (2007) and (2010). The main advantage of the proposed family of probability distributions is that the coordinate axes, along which heavy tails and symmetry can be modelled, are subject to statistical inference. Along a set of specified coordinates both, linear and nonlinear dependence can be expressed in a decomposed form. In the empirical part of the paper we considered a problem of modelling the dynamics of the returns on the spot and future quotations of the WIG20 index from the Warsaw Stock Exchange. On the basis of the posterior odds ratio we checked the data support of considered generalisation, comparing it with BEKK model with the conditional distribution simply constructed as a product of the univariate skewed components. Our example clearly showed the empirical importance of the proposed class of the coordinate free conditional distributions.

Keywords: Bayes factors; multivariate GARCH models; coordinate free distributions; Householder matrices (search for similar items in EconPapers)
JEL-codes: C11 C32 C52 (search for similar items in EconPapers)
Pages: 26
Date: 2013
New Economics Papers: this item is included in nep-ecm and nep-ets
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