Modeling Asymmetric Comovements of Asset Returns

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ID: 292009
1998
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Abstract
Existing time-varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix. In this article we compare the restrictions imposed by the four most popular multivariate GARCH models, and introduce a set of robust conditional moment tests to detect misspecification. We demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices (like estimating the optimal hedge ratio or deriving the risk minimizing portfolio). We therefore introduce a general model which nests these four models and their natural “asymmetric” extensions. The new model is applied to study the dynamic relation between large and small firm returns.
Reference Key
openalex_W2028726096 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Kenneth F. Kroner, Victor Ng
Journal review of financial studies
Year 1998
DOI
10.1093/rfs/11.4.817
URL
https://doi.org/10.1093/rfs/11.4.817
Keywords Keywords not found

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