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http://ssrn.com/abstract=1573471
 
 

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A Dynamic Multivariate Heavy-Tailed Model for Time-Varying Volatilities and Correlations


Drew D. Creal


University of Chicago - Booth School of Business - Econometrics and Statistics

Siem Jan Koopman


VU University Amsterdam; Tinbergen Institute

Andre Lucas


VU University Amsterdam - Faculty of Economics and Business; Tinbergen Institute

March 15, 2010

Tinbergen Institute Discussion Paper 10-032/2

Abstract:     
We propose a new class of observation-driven time-varying parameter models for dynamic volatilities and correlations to handle time series from heavy-tailed distributions. The model adopts generalized autoregressive score dynamics to obtain a time-varying covariance matrix of the multivariate Student's t distribution. The key novelty of our proposed model concerns the weighting of lagged squared innovations for the estimation of future correlations and volatilities. When we account for heavy tails of distributions, we obtain estimates that are more robust to large innovations. The model also admits a representation as a time-varying heavy-tailed copula which is particularly useful if the interest focuses on dependence structures. We provide an empirical illustration for a panel of daily global equity returns.

Number of Pages in PDF File: 32

Keywords: dynamic dependence, multivariate Student's t distribution, copula

JEL Classification: C10, C22, C32, C51

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Date posted: March 24, 2010 ; Last revised: October 14, 2010

Suggested Citation

Creal, Drew D. and Koopman, Siem Jan and Lucas, Andre, A Dynamic Multivariate Heavy-Tailed Model for Time-Varying Volatilities and Correlations (March 15, 2010). Tinbergen Institute Discussion Paper 10-032/2. Available at SSRN: http://ssrn.com/abstract=1573471 or http://dx.doi.org/10.2139/ssrn.1573471

Contact Information

Drew D. Creal (Contact Author)
University of Chicago - Booth School of Business - Econometrics and Statistics ( email )
Chicago, IL 60637
United States
Siem Jan Koopman
VU University Amsterdam ( email )
De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31205986019 (Phone)
HOME PAGE: http://personal.vu.nl/s.j.koopman
Tinbergen Institute ( email )
Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands
HOME PAGE: http://personal.vu.nl/s.j.koopman
Andre Lucas
VU University Amsterdam - Faculty of Economics and Business ( email )
De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)
HOME PAGE: http://www.feweb.vu.nl
Tinbergen Institute
Roetersstraat 31
Amsterdam, 1018 WB
Netherlands
HOME PAGE: http://www.tinbergen.nl
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