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AN EXTENDED CONSTANT CONDITIONAL CORRELATION GARCH MODEL AND ITS FOURTH-MOMENT STRUCTURE

Published online by Cambridge University Press:  01 October 2004

Changli He  and
Timo Teräsvirta
Changli He
Affiliation:
Stockholm School of Economics
Timo Teräsvirta
Affiliation:
Stockholm School of Economics
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Abstract

The constant conditional correlation general autoregressive conditional heteroskedasticity (GARCH) model is among the most commonly applied multivariate GARCH models and serves as a benchmark against which other models can be compared. In this paper we consider an extension to this model and examine its fourth-moment structure. The extension, first defined by Jeantheau (1998, Econometric Theory 14, 70–86), is motivated by the result found and discussed in this paper that the squared observations from the extended model have a rich autocorrelation structure. This means that already the first-order model is capable of reproducing a whole variety of autocorrelation structures observed in financial return series. These autocorrelations are derived for the first- and the second-order constant conditional correlation GARCH model. The usefulness of the theoretical results of the paper is demonstrated by reconsidering an empirical example that appeared in the original paper on the constant conditional correlation GARCH model.This research has been supported by the Swedish Research Council of Humanities and Social Sciences and the Tore Browaldh's Foundation. A part of this work was carried out while the second author was visiting the School of Finance and Economics, University of Technology, Sydney, whose kind hospitality is gratefully acknowledged. The paper has been presented at the Econometric Society European Meeting, Venice, August 2002. We thank participants for comments and two anonymous referees for their remarks. Any errors and shortcomings in the paper remain our own responsibility.

Type
Research Article
Information
Econometric Theory , Volume 20 , Issue 5 , October 2004 , pp. 904 - 926
Copyright
© 2004 Cambridge University Press

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