Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87070
Authors: 
Zhang, Xin
Creal, Drew
Koopman, Siem Jan
Lucas, Andre
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper 11-078/2/DSF22
Abstract: 
We propose a new model for dynamic volatilities and correlations of skewed and heavy-tailed data. Our model endows the Generalized Hyperbolic distribution with time-varying parameters driven by the score of the observation density function. The key novelty in our approach is the fact that the skewed and fat-tailed shape of the distribution directly affects the dynamic behavior of the time-varying parameters. It distinguishes our approach from familiar alternatives such as the generalized autoregressive conditional heteroskedasticity model and the dynamic conditional correlation model where distributional assumptions affect the likelihood but not the parameter dynamics. We present a modified expectation-maximization algorithm to estimate the model. Simulated and empirical evidence shows that the model outperforms its close competitors if skewness and kurtosis are relevant features of the data.
Subjects: 
Dynamic conditional correlations
Generalized Hyperbolic distributions
Observation driven models
JEL: 
C10
C16
C22
C32
Document Type: 
Working Paper

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