Beta observation-driven models with exogenous regressors: a joint analysis of realized correlation and leverage effects

Paolo Gorgi and Siem Jan Koopman
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Paolo Gorgi: Vrije Universiteit Amsterdam

No 20-004/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We consider a general class of observation-driven models with exogenous regressors for double bounded data that are based on the beta distribution. We obtain a stationary and ergodic beta observation-driven process subject to a contraction condition on the stochastic dynamic model equation. We derive conditions for strong consistency and asymptotic normality of the maximum likelihood estimator. The general results are used to study the properties of a beta autoregressive process with threshold effects and to establish the asymptotic properties of the maximum likelihood estimator. We employ the threshold autoregressive model with leverage effects to analyze realized correlations for several sets of stock returns. We find that the impact of past values of realized correlation on future values is at least 10% higher when stock returns are negative rather than positive. This finding supports the conjecture that correlation between stock returns tends to be higher when stock prices are falling, and lower when there is a surge in stock prices. Finally, we conduct an out-of-sample study that shows that our model with leverage effects can enhance the accuracy of point and density forecasts of realized correlations.

Keywords: Double bounded time series; financial econometrics; leverage effects; observation- driven models; realized correlation (search for similar items in EconPapers)
JEL-codes: C32 C52 C58 (search for similar items in EconPapers)
Date: 2020-01-27
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Beta observation-driven models with exogenous regressors: A joint analysis of realized correlation and leverage effects (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20200004

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