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Volatility Comovement: A Multifrequency Approach

Laurent Calvet (), Adlai Fisher and Samuel B. Thompson

No 300, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: We implement a multifrequency volatility decomposition of three exchange rates and show that components with similar durations are strongly correlated across series. This motivates a bivariate extension of the Markov-Switching Multifractal (MSM) introduced in Calvet and Fisher (2001, 2004). Bivariate MSM is a stochastic volatility model with a closed-form likelihood. Estimation can proceed by ML for state spaces of moderate size, and by simulated likelihood via a particle filter in high-dimensional cases. We estimate the model and confirm its main assumptions in likelihood ratio tests. Bivariate MSM compares favorably to a standard multivariate GARCH both in- and out-of-sample. We extend the model to multivariate settings with a potentially large number of assets by proposing a parsimonious multifrequency factor structure.

JEL-codes: C13 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-ifn
Date: 2004-08
Note: TWP
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Published as Calvet, Laurent E., Adlai J. Fisher and Samuel B. Thompson. "Volatility Comovement: A Multifrequency Approach," Journal of Econometrics, 2006, v131(1-2,Mar-Apr), 179-215.

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