nep-ets New Economics Papers
on Econometric Time Series
Issue of 2007‒03‒31
four papers chosen by
Yong Yin
SUNY at Buffalo

  1. Multivariate Realized Stock Market Volatility<br> By Gregory H. Bauer; Keith Vorkink
  2. Income Convergence: The Dickey-Fuller Test under the Simultaneous Presence of Stochastic and Deterministic Trends By Manuel Gomez; Daniel Ventosa-Santaularia
  3. Realized Correlation Tick-by-Tick By Fulvio Corsi; Francesco Audrino
  4. Efficient Likelihood Analysis and Filtering for State-Space Representations By David N. DeJong; Hariharan Dharmarajan; Roman Liesenfeld; Jean-Francois Richard

  1. By: Gregory H. Bauer; Keith Vorkink
    Abstract: We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics. We also introduce a new method to track an index using our model of the realized volatility covariance matrix.
    Keywords: Econometric and statistical methods; Financial markets
    JEL: G14 C53 C32
    Date: 2007
  2. By: Manuel Gomez (School of Economics, Universidad de Guanajuato); Daniel Ventosa-Santaularia (School of Economics, Universidad de Guanajuato)
    Abstract: We investigate the efficiency of the Dickey-Fuller (DF) test as a tool to examine the convergence hypothesis. In doing so, we first describe two possible outcomes, overlooked in previous studies, namely Loose Catching-up and Loose Lagging-behind. Results suggest that this test is useful when the intention is to discriminate between a unit root process and a trend stationary process, though unreliable when used to differentiate between a unit root process and a process with both deterministic and stochastic trends. This issue may explain the lack of support for the convergence hypothesis in the aforementioned literature.
    Keywords: Divergence, Loose Catching-up/Lagging-behind, Convergence, Deterministic and Stochastic trends
    JEL: C32 O40
  3. By: Fulvio Corsi; Francesco Audrino
    Abstract: We propose the Heterogeneous Autoregressive (HAR) model for the estimation and prediction of realized correlations. We construct a realized correlation measure where both the volatilities and the covariances are computed from tick-by-tick data. As for the realized volatility, the presence of market microstructure can induce significant bias in standard realized covariance measure computed with artificially regularly spaced returns. Contrary to these standard approaches we analyse a simple and unbiased realized covariance estimator that does not resort to the construction of a regular grid, but directly and efficiently employs the raw tick-by-tick returns of the two series. Montecarlo simulations calibrated on realistic market microstructure conditions show that this simple tick-by-tick covariance possesses no bias and the smallest dispersion among the covariance estimators considered in the study. In an empirical analysis on S&P 500 and US bond data we find that realized correlations show significant regime changes in reaction to financial crises. Such regimes must be taken into account to get reliable estimates and forecasts.
    Keywords: High frequency data, Realized Correlation, Market Microstructure, Bias correction, HAR, Regimes
    JEL: C13 C22 C51 C53
    Date: 2007–01
  4. By: David N. DeJong; Hariharan Dharmarajan; Roman Liesenfeld; Jean-Francois Richard
    Abstract: . . .
    Date: 2007–03

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