Hierarchical hidden Markov structure for dynamic correlations: the hierarchical RSDC model. - HAL-SHS - Sciences de l'Homme et de la Société Accéder directement au contenu
Pré-Publication, Document De Travail Année : 2008

Hierarchical hidden Markov structure for dynamic correlations: the hierarchical RSDC model.

Résumé

This paper presents a new multivariate GARCH model with time-varying conditional correlation structure which is a generalization of the Regime Switching Dynamic Correlation (RSDC) of Pelletier (2006). This model, which we name Hierarchical RSDC, is building with the hierarchical generalization of the hidden Markov model introduced by Fine et al. (1998). This can be viewed graphically as a tree-structure with different types of states. The first are called production states and they can emit observations, as in the classical Markov-Switching approach. The second are called abstract states. They can't emit observations but establish vertical and horizontal probabilities that define the dynamic of the hidden hierarchical structure. The main gain of this approach compared to the classical Markov-Switching model is to increase the granularity of the regimes. Our model is also compared to the new Double Smooth Transition Conditional Correlation GARCH model (DSTCC), a STAR approach for dynamic correlations proposed by Silvennoinen and Teräsvirta (2007). The reason is that under certain assumptions, the DSTCC and our model represent two classical competing approaches to modeling regime switching. We also perform Monte-Carlo simulations and we apply the model to two empirical applications studying the conditional correlations of selected stock returns. Results show that the Hierarchical RSDC provides a good measure of the correlations and also has an interesting explanatory power.
Fichier principal
Vignette du fichier
DT2008-28.pdf (690.18 Ko) Télécharger le fichier
Origine : Fichiers produits par l'(les) auteur(s)
Loading...

Dates et versions

halshs-00285866 , version 1 (06-06-2008)

Identifiants

  • HAL Id : halshs-00285866 , version 1

Citer

Philippe Charlot, Vêlayoudom Marimoutou. Hierarchical hidden Markov structure for dynamic correlations: the hierarchical RSDC model.. 2008. ⟨halshs-00285866⟩
281 Consultations
509 Téléchargements

Partager

Gmail Facebook X LinkedIn More