Multivariate rotated ARCH models

Working paper

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 fit 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 mdoels is computationally attractive, and the asymptotics are standard. The techniques are illustrated using data on some SJIA stocks.

Authors: Noureldin, D; Shephard, N; Sheppard, K

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2012-02-16
• Paper number: 594
• Keywords: common persistence; RARCH; predictive likelihood; multivariate volatility; covariance targeting; RCC; empirical Bayes