Copula-Based Specification of Vector MEMs

25 Pages Posted: 6 Apr 2016

See all articles by Fabrizio Cipollini

Fabrizio Cipollini

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

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

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: April 5, 2016

Abstract

The Multiplicative Error Model (Engle (2002)) for nonnegative valued processes is specified as the product of a (conditionally autoregressive) scale factor and an innovation process with nonnegative support. A multivariate extension allows for the innovations to be contemporaneously correlated. We overcome the lack of sufficiently flexible probability density functions for such processes by suggesting a copula function approach to estimate the parameters of the scale factors and of the correlations of the innovation processes. We illustrate this vector MEM with an application to the interactions between realized volatility, volume and the number of trades. We show that significantly superior realized volatility forecasts are delivered in the presence of other trading activity indicators and contemporaneous correlations.

Keywords: GARCH; MEM; Realized Volatility; Trading Volume; Trading Activity; Copula; Volatility Forecasting

JEL Classification: C32, C53, C58

Suggested Citation

Cipollini, Fabrizio and Engle, Robert F. and Gallo, Giampiero M., Copula-Based Specification of Vector MEMs (April 5, 2016). Available at SSRN: https://ssrn.com/abstract=2759451 or http://dx.doi.org/10.2139/ssrn.2759451

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)

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Giampiero M. Gallo (Contact Author)

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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