Multivariate Mixed Normal Conditional Heteroskedasticity
CORE Discussion Paper No. 2006/12
23 Pages Posted: 15 Jul 2006
Date Written: February 2006
We propose a new multivariate volatility model where the conditional distribution of a vector time series is given by a mixture of multivariate normal distributions. Each of these distributions is allowed to have a time-varying covariance matrix. The process can be globally covariance-stationary even though some components are not covariance-stationary. We derive some theoretical properties of the model such as the unconditional covariance matrix and autocorrelations of squared returns. The complexity of the model requires a powerful estimation algorithm. In a simulation study we compare estimation by maximum likelihood with the EM algorithm and Bayesian estimation with a Gibbs sampler. Finally, we apply the model to daily U.S. stock returns.
Keywords: Multivariate volatility, Finite mixture, EM algorithm, Bayesian inference
JEL Classification: C11, C22, C52
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