[R-SIG-Finance] Garch and multivariate garch

[Eric Zivot]

The Bauwens survey paper in the Journal of Applied Econometrics is very good, but it lacks any practical examples of actually estimating multivariate garch models. In fact, I don't know of any survey paper that discusses the real life practical issues of estimating multivariate garch models. A good intuitive guide to forecasting correlation is in Carol alexander's book Market Models. Unfortunately, she spends a lot of time plugging her orthogonal garch model which is rather problematic in practice. A big problem in assessing the accuracy of estimating something like a conditional correlation is that the "true" time varying correlation is not observable so that the output of a multivariate garch model cannot be compared to an "actual" correlation to assess forecasting accuracy. One can try to follow Andersen and Bollerslev and try to compare a garch correlation forecast to a realized correlation 
computed from high frequency data. However, this is also fraught with problems as it is not clear how one is supposed to compute realized correlation. I have a paper under preparation that looks at evaluating multivariate garch models using realized correlation. Unfortunately, none of the typical multivariate garch models work very well - especially the dynamic conditional correlation model of Engle. This is often the worst model! I have a reference list of some empirical multivariate garch papers and I'll post some references later this week.


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*  Eric Zivot                  			               *
*  Professor and Gary Waterman Distinguished Scholar           *
*  Department of Economics                                     *
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On Sun, 13 Apr 2008, michal miklovic wrote:

> Hi,
>
> I am quite familiar with univariate garch models but, unfortunately, not an expert on multivariate garch models. However, I would recommend that you have a look at this paper:
> Bauwens, Laurent, Rombouts (2006): Multivariate garch models: a survey, J. of applied econometrics 21, pp. 79 - 109.
> Chapter 3 in the following book provides a highly readable and not very technical description of the dynamic conditional correlation multivariate garch model of Engle (2002), which has been implemented in several statistical software packages but I am not not aware of an implementation in R.
> Christoffersen (2003): Elements of financial risk management, Academic Press
>
> The Engle reference is:
> Engle (2002): Dynamic conditional correlation - a simple class of multivariate garch models, J. of business and economic statistics 20, pp. 339 - 350.
>
> Hope this helps.
>
> Best regards,
>
> Michal
>
>
>
> ----- Original Message ----
> From: Matthieu Boyer <matthieudm.boyer at gmail.com>
> To: r-sig-finance at stat.math.ethz.ch
> Sent: Sunday, March 30, 2008 12:40:40 PM
> Subject: [R-SIG-Finance] Garch and multivariate garch
>
> Hello everybody,
> I know that there is a lot of messages regarding this topic but it starts
> becoming a wonderful mess!
> I just wanted to know if I can chat some day with somebody who knows garch
> models and more particularly multivariate garch model.
> I'm a student and I'm working with a big insurance company on volatility
> estimation and the next step is to work on correlation.
> I've already done some research on the web and I've found 2 methods:
> -first, use a little trick with an univariate garch (
> http://www.burns-stat.com/pages/Working/multgarchuni.pdf)
> -the second method consists in using mgarchbekk package.
> As the whole theory about garch is quite recent, I don't have any hindsight
> on it!
>
> I hope that someone will help me!
> Have a good day everybody!
> Matt
>
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