Structured Multivariate Volatility Models

39 Pages Posted: 21 Dec 2008 Last revised: 29 Jun 2009

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Paolo Paruolo

European Commission DG Joint Research Centre; Joint Research Center of the European Commission

Date Written: December 20, 2008

Abstract

This paper proposes structured parametrizations for multivariate volatility models, which use spatial weight matrices induced by economic proximity. These structured specifications aim at solving the curse of dimensionality problem, which limits feasibility of model-estimation to small cross-sections for unstructured models. Structured parametrizations possess the following four desirable properties: i) they are flexible, allowing for covariance spill-over; ii) they are parsimonious, being characterized by a number of parameters that grows only linearly with the cross-section dimension; iii) model parameters have a direct economic interpretation that reflects the chosen notion of economic classification; iv) model-estimation computations are faster than for unstructured specifications. We give examples of structured specifications for multivariate GARCH models as well as for Stochastic- and Realized-Volatility models. The paper also discusses how to construct spatial weight matrices that are time-varying and possibly derived from a set of covariates.

Keywords: MGARCH, Stochastic Volatility, Realized Volatility, Spatial models, ANOVA

JEL Classification: C31, C32, G11

Suggested Citation

Caporin, Massimiliano and Paruolo, Paolo and Paruolo, Paolo, Structured Multivariate Volatility Models (December 20, 2008). Available at SSRN: https://ssrn.com/abstract=1318639 or http://dx.doi.org/10.2139/ssrn.1318639

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Paolo Paruolo

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
1049
Belgium

European Commission DG Joint Research Centre ( email )

Via E.Fermi 2749
Ispra, Varese I-21027
Italy

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