Copula-based dynamic conditional correlation multiplicative error processes : [Version 18 April 2013]

  • We introduce a copula-based dynamic model for multivariate processes of (non-negative) high-frequency trading variables revealing time-varying conditional variances and correlations. Modeling the variables’ conditional mean processes using a multiplicative error model we map the resulting residuals into a Gaussian domain using a Gaussian copula. Based on high-frequency volatility, cumulative trading volumes, trade counts and market depth of various stocks traded at the NYSE, we show that the proposed copula-based transformation is supported by the data and allows capturing (multivariate) dynamics in higher order moments. The latter are modeled using a DCC-GARCH specification. We suggest estimating the model by composite maximum likelihood which is sufficiently flexible to be applicable in high dimensions. Strong empirical evidence for time-varying conditional (co-)variances in trading processes supports the usefulness of the approach. Taking these higher-order dynamics explicitly into account significantly improves the goodness-of-fit of the multiplicative error model and allows capturing time-varying liquidity risks.

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Metadaten
Author:Taras Bodnar, Nikolaus HautschORCiDGND
URN:urn:nbn:de:hebis:30:3-324967
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2013,19
Series (Serial Number):CFS working paper series (2013, 19)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/12/16
Tag:DCC-GARCH; copula; liquidity risk; multiplicative error model; trading process
Issue:Version 18 April 2013
Page Number:33
HeBIS-PPN:349976384
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C3 Multiple or Simultaneous Equation Models / C32 Time-Series Models; Dynamic Quantile Regressions (Updated!)
C Mathematical and Quantitative Methods / C4 Econometric and Statistical Methods: Special Topics / C46 Specific Distributions; Specific Statistics (Updated!)
C Mathematical and Quantitative Methods / C5 Econometric Modeling / C50 General
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht