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

Tinbergen Institute Discussion Paper 10-032/2

32 Pages Posted: 24 Mar 2010 Last revised: 14 Oct 2010

Drew D. Creal

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

Siem Jan Koopman

Vrije Universiteit Amsterdam; Tinbergen Institute

Andre Lucas

VU Amsterdam - School of Business and Economics; Tinbergen Institute

Date Written: March 15, 2010

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.

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

JEL Classification: C10, C22, C32, C51

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: https://ssrn.com/abstract=1573471 or http://dx.doi.org/10.2139/ssrn.1573471

Drew D. Creal (Contact Author)

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States

Siem Jan Koopman

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Andre Lucas

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

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