Multivariate Stochastic Volatility with Co-Heteroscedasticity
Roberto Leon-Gonzalez () and
Rodney Strachan ()
Additional contact information
Arnaud Doucet: University of Oxford, UK
Working Paper series from Rimini Centre for Economic Analysis
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. That is, these linear combinations are homoscedastic; a property we call 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 impulse response analysis but is generally important for, e.g., volatility estimation and variance decompositions. 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 alternating-order particle Gibbs that reduces the amount of particles needed for accurate estimation. We provide two empirical applications; one to exchange rate data and another to a large Vector Autoregression (VAR) of US macroeconomic variables. We find strong evidence for co-heteroscedasticity and, in the second application, estimate the impact of monetary policy on the homoscedastic and heteroscedastic components of macroeconomic variables.
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)
JEL-codes: C11 C15 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: Multivariate stochastic volatility with co-heteroscedasticity (2018)
Working Paper: Multivariate Stochastic Volatility with Co-Heteroscedasticity (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:18-38
Access Statistics for this paper
More papers in Working Paper series from Rimini Centre for Economic Analysis Contact information at EDIRC.
Bibliographic data for series maintained by Marco Savioli ().