FIN-01-029

Large Scale Conditional Covariance Matrix Modeling, Estimation and Testing

May, 2001

Zhuanxin Ding and Robert F. Engle

ABSTRACT

A new representation of the diagonal Vech model is given using the Hadamard product. Sufficient conditions on parameter matrices are provided to ensure the positive definiteness of covariance matrices from the new representation. Based on this, some new and simple models are discussed. A set of diagnostic tests for multivariate ARCH models is proposed. The tests are able to detect various model misspecifications by examing the orthogonality of the squared normalized residuals. A small Monte-Carlo study is carried out to check the small sample performance of the test. An empirical example is also given as guidance for model estimation and selection in the multivariate framework. For the specific data set considered, it is found that the simple one and two parameter models and the constant conditional correlation model perform fairly well.


Robert F. Engle
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0710
Fax: (212) 995-4220
Email: rengle@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~rengle

Zhuanxin Ding
Institution: Frank Russell Company, Tacoma, WA 98401, USA

To download a copy of this paper click here
To request a copy of this paper click here

The Finance Department Working Paper Series has been generously sponsored by