Seminar

Flexible Covariance-Targeting Volatility Models

Kevin Sheppard (Oxford University)

October 18, 2011, 15:30–17:00

Toulouse

Room MS003

Econometrics Seminar

Abstract

This paper introduces a new class of multivariate volatility models which is easy to estimate using covariance targeting. The basic structure is to rotate the returns and then to .t them using a BEKK model of the time-varying covariance whose long-run covariance is the identity matrix. The extension to DCC type models is given, enriching this class. Inference for these models is computationally attractive, and the asymptotics is standard. The techniques are illustrated using recent data on the S&P 500 ETF and some DJIA stocks.