A Multivariate Generalized Orthogonal Factor GARCH Model

Lanne, Markku and Saikkonen, Pentti (2005): A Multivariate Generalized Orthogonal Factor GARCH Model.

Abstract

The paper studies a factor GARCH model and develops test procedures which can be used to test the number of factors needed to model the conditional heteroskedasticity in the considered time series vector. Assuming normally distributed errors the parameters of the model can be straightforwardly estimated by the method of maximum likelihood. Inefficient but computationally simple preliminary estimates are first obtained and used as initial values to maximize the likelihood function. Maximum likelihood estimation with nonnormal errors is also straightforward. Motivated by the empirical application of the paper a mixture of normal distributions is considered. An interesting feature of the implied factor GARCH model is that some parameters of the conditional covariance matrix which are not identifiable in the case of normal errors become identifiable when the mixture distribution is used. As an empirical example we consider a system of four exchange rate return series.

• Item Type: MPRA Paper
• Language: English
• Keywords: Multivariate GARCH model; mixture of normal distributions; exchange rate
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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