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Multivariate Rotated ARCH Models

Author

Listed:
  • Diaa Noureldin

    (Dept of Economics and Oxford-Man Institute of Quantitative Finance, University of Oxford)

  • Neil Shephard

    (Dept of Economics and Oxford-Man Institute of Quantitative Finance, University of Oxford.)

  • Kevin Sheppard

    (Dept of Economics and Oxford-Man Institute of Quantitative Finance, University of Oxford.)

Abstract

This paper introduces a new class of multivariate volatility models which is easy to estimate using covariance targeting, even with rich dynamics. We call them rotated ARCH (RARCH) models. The basic structure is to rotate the returns and then to ?t them using a BEKK-type parameterization of the time-varying covariance whose long-run covariance is the identity matrix. The extension to DCC-type parameterizations is given, introducing the rotated conditional correlation (RCC) model. Inference for these models is computationally attractive, and the asymptotics are standard. The techniques are illustrated using data on some DJIA stocks.

Suggested Citation

  • Diaa Noureldin & Neil Shephard & Kevin Sheppard, 2012. "Multivariate Rotated ARCH Models," Economics Papers 2012-W01, Economics Group, Nuffield College, University of Oxford.
    • Handle: RePEc:nuf:econwp:1201
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    File URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/covtar_bekk_v3.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    RARCH; RCC; multivariate volatility; covariance targeting; common persistence; empirical Bayes; predictive likelihood.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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