Multiplicative Error Models

26 Pages Posted: 27 May 2011

See all articles by Christian T. Brownlees

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

Fabrizio Cipollini

Universita di Firenze, DiSIA (Dipartimento di Statistica, Informatica, Applicazioni)

Giampiero M. Gallo

Corte dei Conti - Italian Court of Audits; University of Bologna - Rimini Center for Economic Analysis (RCEA); Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti"

Date Written: March 31, 2011

Abstract

Financial time series analysis has focused on data related to market trading activity. Next to the modeling of the conditional variance of returns within the GARCH family of models, recent attention has been devoted to other variables: First, and foremost, volatility measured on the basis of ultra -- high frequency data, but also volumes, number of trades, durations. In this paper, we examine a class of models, named Multiplicative Error Models, which are particularly suited to model such non-negative time series. We discuss the univariate specification, by considering the base choices for the conditional expectation and the error term. We provide also a general framework, allowing for richer specifications of the conditional mean. The outcome is a novel MEM (called Composite MEM) which is reminiscent of the short and long -- run component GARCH model by Engle & Lee (1999). Inference issues are discussed relative to Maximum Likelihood and Generalized Method of Moments estimation. In the application, we show the regularity in parameter estimates and forecasting performance obtainable by applying the MEM to the realized kernel volatility of components of the S&P100 index.

Keywords: MEM, Realized Volatility, Forecasting

JEL Classification: C22, C51, C52, C53

Suggested Citation

Brownlees, Christian T. and Cipollini, Fabrizio and Gallo, Giampiero M., Multiplicative Error Models (March 31, 2011). Available at SSRN: https://ssrn.com/abstract=1852285 or http://dx.doi.org/10.2139/ssrn.1852285

Christian T. Brownlees (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://84.89.132.1/~cbrownlees/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain

Fabrizio Cipollini

Universita di Firenze, DiSIA (Dipartimento di Statistica, Informatica, Applicazioni) ( email )

Viale Morgagni, 59
Florence, Florence 50134
Italy
+39 055 2751592 (Phone)
+39 055 4223560 (Fax)

Giampiero M. Gallo

Corte dei Conti - Italian Court of Audits ( email )

viale Mazzini
Roma, Roma 00195
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti" ( email )

Viale G.B. Morgagni, 59
Florence, 50134
Italy
0039 055 2751 591 (Phone)
0039 055 4223560 (Fax)

HOME PAGE: http://www.disia.unifi.it/gallog

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