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on Econometric Time Series |
| By: | Francesco Audrino; Fabio Trojani |
| Abstract: | We propose a multivariate nonparametric technique for generating reliable shortterm historical yield curve scenarios and confidence intervals. The approach is based on a Functional Gradient Descent (FGD) estimation of the conditional mean vector and covariance matrix of a multivariate interest rate series. It is computationally feasible in large dimensions and it can account for non-linearities in the dependence of interest rates at all available maturities. Based on FGD we apply filtered historical simulation to compute reliable out-of-sample yield curve scenarios and confidence intervals. We back-test our methodology on daily USD bond data for forecasting horizons from 1 to 10 days. Based on several statistical performance measures we find significant evidence of a higher predictive power of our method when compared to scenarios generating techniques based on (i) factor analysis, (ii) a multivariate CCC-GARCH model, or (iii) an exponential smoothing covariances estimator as in the RiskMetricsTM approach. |
| Keywords: | Conditional mean and variance estimation, Filtered Historical Simulation, Functional Gradient Descent, Term structure; Multivariate CCC-GARCH models |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-24&r=ets |
| By: | Francesco Audrino; Fabio Trojani |
| Abstract: | We propose a new multivariate GARCH model with Dynamic Conditional Correlations that extends previous models by admitting multivariate thresholds in conditional volatilities and correlations. The model estimation is feasible in large dimensions and the positive deniteness of the conditional covariance matrix is easily ensured by the structure of the model. Thresholds in conditional volatilities and correlations are estimated from the data, together with all other model parameters. We study the performance of our model in three distinct applications to US stock and bond market data. Even if the conditional volatility functions of stock returns exhibit pronounced GARCH and threshold features, their conditional correlation dynamics depends on a very simple threshold structure with no local GARCH features. We obtain a similar result for the conditional correlations between government and corporate bond returns. On the contrary, we ÃÂïnd both threshold and GARCH structures in the conditional correlations between stock and government bond returns. In all applications, our model improves signiÃÂïcantly the in-sample and out-of-sample forecasting power for future conditional correlations with respect to other relevant multivariate GARCH models. |
| Keywords: | Multivariate GARCH models, Dynamic conditional correlations, Tree-structured GARCH models |
| JEL: | C12 C13 C51 C53 C61 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-25&r=ets |