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Estimation of Volatility and Correlation with Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models: An Application to Moroccan Stock Markets

Author

Listed:
  • Yassine Belasri

    (Laboratory of Study and Research in Applied Mathematics, LERMA, Mohammed V University, Agdal, Morocco,
    Mohammadia School of Engineering, BP 765, Rabat, Agdal, Morocco.)

  • Rachid Ellaia

    (Laboratory of Study and Research in Applied Mathematics, LERMA, Mohammed V University, Agdal, Morocco,
    Mohammadia School of Engineering, BP 765, Rabat, Agdal, Morocco.)

Abstract

Volatility and correlation are important metrics of risk evaluation for financial markets worldwide. The latter have shown that these tools are varying over time, thus, they require an appropriate estimation models to adequately capture their dynamics. Multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models were developed for this purpose and have known a great success. The purpose of this article is to examine the performance of multivariate GARCH models to estimate variance covariance matrices in application to 10 years of daily stock prices in Moroccan stock markets. The estimation is done through the most widely used multivariate GARCH models, dynamic conditional correlation (DCC) and Baba, Engle, Kraft and Kroner (BEKK) models. A comparison of estimated results is done using multiple statistical tests and with application to volatility forecast and value at risk (VaR) calculation. The results show that BEKK model performs better than DCC in modeling variance covariance matrices and that both models failed to adequately estimate VaR.

Suggested Citation

  • Yassine Belasri & Rachid Ellaia, 2017. "Estimation of Volatility and Correlation with Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models: An Application to Moroccan Stock Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 384-396.
    • Handle: RePEc:eco:journ1:2017-02-52
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    Cited by:

    1. Alina Zaharia, 2021. "Estimation of Correlation between Capital Markets. Analysing the case of Central and Eastern European markets in the context of the COVID-19 pandemic," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 13(1), pages 61-78, June.

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    More about this item

    Keywords

    Volatility; Correlation; Multivariate Generalized Autoregressive Conditional Heteroskedasticity; Diagonal Baba; Engle; Kraft and Kroner; Dynamic Conditional Correlation; Stock Markets; Morocco;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets

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