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Realized matrix-exponential stochastic volatility with asymmetry, long memory and higher-moment spillovers

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  • Asai, Manabu
  • Chang, Chia-Lin
  • McAleer, Michael
Abstract
The paper develops a novel realized matrix-exponential stochastic volatility model of multivariate returns and realized covariances that incorporates asymmetry and long memory (hereafter the RMESV-ALM model), and higher-moment spillovers. The matrix exponential transformation guarantees the positive definiteness of the dynamic covariance matrix. We decompose the likelihood function of the RMESV-ALM model into two components: one based on the conventional Kalman filter, and the other evaluated by a Monte Carlo likelihood technique. We consider a two-step quasi-maximum likelihood estimator for maximizing the likelihood function, and examine the finite sample properties of the estimator. The specification enables us to analyze asymmetric and higher-moment spillover effects in the covariance dynamics via news impact curves and impulse response functions. Using high frequency data for three US financial assets, the new model is estimated and evaluated. The forecasting performance of the new model is compared with a novel dynamic realized matrix-exponential conditional covariance model. Our empirical results suggest the RMESV-ALE specification to be superior, and spillover effects are found from returns or volatility to the remaining volatilities.

Suggested Citation

  • Asai, Manabu & Chang, Chia-Lin & McAleer, Michael, 2022. "Realized matrix-exponential stochastic volatility with asymmetry, long memory and higher-moment spillovers," Journal of Econometrics, Elsevier, vol. 227(1), pages 285-304.
    • Handle: RePEc:eee:econom:v:227:y:2022:i:1:p:285-304
    DOI: 10.1016/j.jeconom.2021.06.008
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    More about this item

    Keywords

    Matrix-exponential transformation; Realized stochastic covariances; Realized conditional covariances; Asymmetry; Long memory; Higher-moment spillovers; Dynamic covariance matrix; Finite sample properties; Forecasting performance;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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