Multivariate GARCH models. The time varying variance-covariance for the exchange rate

Tekle Bobo

• Publisher: GRIN Verlag
• Year: 2020
• Edition: 1
• eBook ISBN:
  9783346288905
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Literature Review from the year 2020 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, , language: English, abstract: This paper is a review to the GARCH family's models. Since the seminal paper of Engle from 1982, much advancement has been made in understanding GARCH models and their multivariate extensions. In MGARCH models parsimonious models should be used to overcome the difficulty of estimating the VEC model ensuring MGARCH modeling is to provide a realistic and parsimonious specification of the variance matrix ensuring its positivity. BEKK models are flexible but require too many parameters for multiple time series of more than four elements. BEKK models are much more parsimonious but very restrictive for the cross-dynamics. They are not suitable if volatility transmission is the object of interest, but they usually do a good job in representing the dynamics of variances and covariance. DCC models allow for different persistence between variances and correlations, but impose common persistence in the latter (although this may be relaxed) Student's t distribution assumption is more proper under negative skewness and high kurtosis of return series. Understanding and predicting the temporal dependence in the second-order moments of asset returns is important for many issues in financial econometrics. It is now widely accepted that financial volatilities move together over time across assets and markets. Recognizing this feature through a multivariate modeling framework leads to more relevant empirical models than working with separate univariate models. From a financial point of view, it opens the door to better decision tools in various areas, such as asset pricing, portfolio selection, option pricing, and hedging and risk management. Indeed, unlike at the beginning of the 1990s, several institutions have now developed the necessary skills to use the econometric theory in a financial perspective.