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Proxy-identification of a structural MGARCH model for asset returns

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  • Fengler, Matthias
  • Polivka, Jeannine

Abstract

We extend the multivariate GARCH (MGARCH) specification for volatility modeling by developing a structural MGARCH model that targets the identification of shocks and volatility spillovers in a speculative return system. Similarly to the proxy-SVAR framework, we leverage auxiliary proxy variables to identify the underlying shock system. The estimation of structural parameters, including an orthogonal matrix, is achieved through techniques derived from Riemannian optimization. Our analysis of daily S&P 500 returns, 10-year Treasury yields, and the U.S. Dollar Index, employing news-driven instrument variables, identifies an equity and a bond market shock.

Suggested Citation

  • Fengler, Matthias & Polivka, Jeannine, 2021. "Proxy-identification of a structural MGARCH model for asset returns," Economics Working Paper Series 2103, University of St. Gallen, School of Economics and Political Science, revised Oct 2024.
    • Handle: RePEc:usg:econwp:2021:03
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    Cited by:

    1. Fengler, Matthias & Polivka, Jeannine, 2022. "Structural Volatility Impulse Response Analysis," Economics Working Paper Series 2211, University of St. Gallen, School of Economics and Political Science, revised Nov 2022.

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    More about this item

    Keywords

    identification; Riemannian optimization; structural MGARCH; structural modeling; variance decomposition; volatility spillovers;
    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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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