A Multivariate GARCH Model with Time-Varying Correlations

Y. K. Tse () and Albert Tsui

Econometrics from University Library of Munich, Germany

Abstract: In this paper we propose a new multivariate GARCH model with time- varying correlations. We adopt the vech representation based on the conditional variances and the conditional correlations. While each conditional-variance term is assumed to follow a univariate GARCH formulation, the conditional-correlation matrix is postulated to follow an autoregressive moving average type of analogue. By imposing some suitable restrictions on the conditional-correlation-matrix equation, we construct a MGARCH model in which the conditional-correlation matrix is guaranteed to be positive definite during the optimisation. Thus, our new model retains the intuition and interpretation of the univariate GARCH model and yet satisfies the positive-definite condition as found in the constant-correlation and BEKK models. We report some Monte Carlo results on the finite-sample distributions of the MLE of the varying- correlation MGARCH model. The new model is applied to some real data sets. It is found that extending the constant-correlation model to allow for time-varying correlations provides some interesting time histories that are not available in a constant-correlation model.

Keywords: BEKK models; constant correlation; Monte Carlo method; multivariate GARCH model; maximum likelihood estimate; varying correlation (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2000-11-06
New Economics Papers: this item is included in nep-ecm and nep-ets
Note: Type of Document - Acrobat PDF; prepared on SW2.5; to print on HP/PostScript/Franciscan monk; pages: 30; figures: included
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: A Multivariate GARCH Model with Time-Varying Correlations (2000)
Working Paper: A Multivariate GARCH Model with Time-Varying correlations (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:0004007

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