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New approaches of the DCC-GARCH residual: Application to foreign exchange rates

Author

Listed:
  • Kenichiro Shiraya

    (Graduate School of Economics, The University of Tokyo)

  • Kanji Suzuki

    (Department of Mathematics, ETH Zurich. Department of Banking and Finance, University of Zurich)

  • Tomohisa Yamakami

    (Graduate School of Economics, The University of Tokyo. Mizuho-DL Financial Technology Co., Ltd.)

Abstract

Two formulations are proposed to filter out correlations in the residuals of the multivariate GARCH model. The first approach is to estimate the correlation matrix as a parameter and transform any joint distribution to have an arbitrary correlation matrix. The second approach transforms time series data into an uncorrelated residual based on the eigenvalue decomposition of a correlation matrix. The empirical performance of these methods is examined through a prediction task for foreign exchange rates and compared with other methodologies in terms of the out-of-sample likelihood. By using these approaches, the DCC-GARCH residual can be almost independent. This paper is available at https://arxiv.org/abs/2411.08246

Suggested Citation

  • Kenichiro Shiraya & Kanji Suzuki & Tomohisa Yamakami, 2024. "New approaches of the DCC-GARCH residual: Application to foreign exchange rates," CARF F-Series CARF-F-592, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  • Handle: RePEc:cfi:fseres:cf592
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