A Geometric GARCH Framework for Covariance Dynamics

52 Pages Posted: 24 Aug 2016

See all articles by Chulwoo Han

Chulwoo Han

Durham Business School

Frank C. Park

Seoul National University

Date Written: August 21, 2016

Abstract

This paper develops new multivariate GARCH models that respect intrinsic geometric properties of covariance matrix, and are physically meaningful. These models can be specified using either asset returns or realized covariances. New parameter estimation method and performance evaluation methods are also developed, and limitations of existing evaluation methods are addressed. Empirical results suggest that our models outperform existing models such as BEKK and DCC, and realized covariance based models outperform return based models. It turns out that the variation of covariance matrix can be identified by a few principal directions, implying potential for a parsimonious specification of covariance dynamics.

Keywords: Geometric GARCH; Multivariate GARCH; Covariance; Realized Covariance; Principal Geodesic Analysis

Suggested Citation

Han, Chulwoo and Park, Frank C., A Geometric GARCH Framework for Covariance Dynamics (August 21, 2016). Available at SSRN: https://ssrn.com/abstract=2827358 or http://dx.doi.org/10.2139/ssrn.2827358

Chulwoo Han (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Frank C. Park

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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