Automated Variable Selection in Vector Multiplicative Error Models
41 Pages Posted: 2 Feb 2009
Date Written: November 20, 2008
Multiplicative Error Models (MEM) can be used to trace the dynamics of non- negative valued processes. Interactions between several such processes are accommodated by the vector MEM and estimated by maximum likelihood (Gamma marginals with copula functions) or by Generalized Method of Moments. In choosing the relevant variables one can follow an automated procedure where the full specification is successively pruned in a general-to-specific approach. An efficient and fast algorithm is presented in this paper and evaluated by means of a simulation and a real world example of volatility spillovers in European markets.
Keywords: MEM, Model Selection, Analytic Derivatives, GMM, Copulas
JEL Classification: C22, C51, C52, C53
Suggested Citation: Suggested Citation