Long Memory Dynamics for Multivariate Dependence Under Heavy Tails

Tinbergen Institute Discussion Paper 11-175/5/DSF28

43 Pages Posted: 14 Dec 2011

See all articles by Pawel Janus

Pawel Janus

VU University Amsterdam

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Andre Lucas

Vrije Universiteit Amsterdam; Tinbergen Institute

Date Written: December 9, 2011

Abstract

We develop a new simultaneous time series model for volatility and dependence with long memory (fractionally integrated) dynamics and heavy-tailed densities. Our new multivariate model accounts for typical empirical features in financial time series while being robust to outliers or jumps in the data. In the empirical study for four Dow Jones equities, we find that the degree of memory in the volatilities of the equity return series is similar, while the degree of memory in correlations between the series varies significantly. The forecasts from our model are compared with high-frequency realized volatility and dependence measures. The forecast accuracy is overall higher compared to those from some well-known competing benchmark models.

Keywords: fractional integration, correlation, student's t copula, time-varying dependence, multivariate volatility

JEL Classification: C10, C22, C32, C51

Suggested Citation

Janus, Pawel and Koopman, Siem Jan and Lucas, Andre, Long Memory Dynamics for Multivariate Dependence Under Heavy Tails (December 9, 2011). Tinbergen Institute Discussion Paper 11-175/5/DSF28, Available at SSRN: https://ssrn.com/abstract=1971255 or http://dx.doi.org/10.2139/ssrn.1971255

Pawel Janus (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Andre Lucas

Vrije Universiteit Amsterdam ( email )

SBE/EDS, De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

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