Vector Multiplicative Error Models: Representation and Inference
Universita di Firenze, Dipartimento di Statistica
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Giampiero M. Gallo
Universita' di Firenze - Dipartimento di Statistica
NBER Working Paper No. w12690
The Multiplicative Error Model introduced by Engle (2002) for positive valued processes is specified as the product of a (conditionally autoregressive) scale factor and an innovation process with positive support. In this paper we propose a multi-variate extension of such a model, by taking into consideration the possibility that the vector innovation process be contemporaneously correlated. The estimation procedure is hindered by the lack of probability density functions for multivariate positive valued random variables. We suggest the use of copulafunctions and of estimating equations to jointly estimate the parameters of the scale factors and of the correlations of the innovation processes. Empirical applications on volatility indicators are used to illustrate the gains over the equation by equation procedure.
Number of Pages in PDF File: 54working papers series
Date posted: November 20, 2006
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