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
VU University Amsterdam - Faculty of Economics and Business; Tinbergen Institute
March 15, 2010
Tinbergen Institute Discussion Paper 10-032/2
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
Date posted: March 24, 2010 ; Last revised: October 14, 2010
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