Multivariate Stochastic Volatility with Co-Heteroscedasticity

Joshua Chan, Arnaud Doucet, Roberto Leon-Gonzalez and Rodney Strachan
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Arnaud Doucet: University of Oxford

No 20-09, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

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; a property known as 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 volatility estimation. By incorporating testable co-heteroscedasticity restrictions, 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 alternatingorder particle Gibbs that reduces the amount of particles needed for accurate estimation. We provide an empirical application to a large Vector Autoregression (VAR), in which we find strong evidence for co-heteroscedasticity and that the new method compares favorably to previous ones in terms of forecasting from horizon 3 onward. A Monte Carlo experiment illustrates that the new method estimates well the characteristics of approximate factor models with heteroscedastic errors.

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)
Pages: 44 pages
Date: 2020-09
New Economics Papers: this item is included in nep-dcm and nep-rmg
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Multivariate stochastic volatility with co-heteroscedasticity (2018)
Working Paper: Multivariate Stochastic Volatility with Co-Heteroscedasticity (2018)
Working Paper: Multivariate Stochastic Volatility with Co-Heteroscedasticity (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ngi:dpaper:20-09

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