MULTIVARIATE STOCHASTIC VOLATILITY MODELS: BAYESIAN ESTIMATION AND MODEL COMPARISON
Jun Yu School of Economics and Social Sciences, Singapore Management
University, Singapore
Renate Meyer Department of Statistics, University of Auckland,
Auckland, New Zealand
In this paper we show that fully likelihood-based estimation and comparison of multivariate stochastic volatility (SV) models can be easily performed via a freely available Bayesian software called WinBUGS. Moreover, we introduce to the literature several new specifications that are natural extensions to certain existing models, one of which allows for time-varying correlation
coefficients. Ideas are illustrated by fitting, to a bivariate time series data of weekly exchange rates, nine multivariate SV models, including the specifications with Granger causality in volatility, time-varying correlations, heavy-tailed error distributions, additive factor structure, and multiplicative factor structure. Empirical results suggest that the best specifications are those that allow for time-varying correlation coefficients.
Keywords DIC; Factors; Granger causality in volatility; Heavy-tailed distributions; MCMC; Multivariate stochastic volatility; Time-varying correlations.
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