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Modelling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH Model

Author

Listed:
  • Annastiina Silvennoinen
  • Timo Teräsvirta

    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Abstract
In this paper we propose a multivariate GARCH model with a time-varying conditional correlation structure. The new Double Smooth Transition Conditional Correlation GARCH model extends the Smooth Transition Conditional Correlation GARCH model of Silvennoinen and Ter¨asvirta (2005) by including another variable according to which the correlations change smoothly between states of constant correlations. A Lagrange multiplier test is derived to test the constancy of correlations against the DSTCC–GARCH model, and another one to test for another transition in the STCC–GARCH framework. In addition, other specification tests, with the aim of aiding the model building procedure, are considered. Analytical expressions for the test statistics and the required derivatives are provided. The model is applied to a selection of world stock indices, and it is found that time is an important factor affecting correlations between them.

Suggested Citation

  • Annastiina Silvennoinen & Timo Teräsvirta, 2008. "Modelling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH Model," CREATES Research Papers 2008-05, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2008-05
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    References listed on IDEAS

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    More about this item

    Keywords

    Multivariate GARCH; Constant conditional correlation; Dynamic conditional correlation; Return comovement; Variable correlation GARCH model; Volatility model evaluation;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • 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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G1 - Financial Economics - - General Financial Markets

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