Fast estimation of multivariate stochastic volatility

Details Fast estimation of multivariate stochastic volatility Fast estimation of multivariate stochastic volatility

2007-08-31

arxiv.org/abs/0708.4376v2

Economy

Quantitative Finance

Statistical Finance

15 pages, 4 figures

Scientific paper

In this paper we develop a Bayesian procedure for estimating multivariate stochastic volatility (MSV) using state space models. A multiplicative model based on inverted Wishart and multivariate singular beta distributions is proposed for the evolution of the volatility, and a flexible sequential volatility updating is employed. Being computationally fast, the resulting estimation procedure is particularly suitable for on-line forecasting. Three performance measures are discussed in the context of model selection: the log-likelihood criterion, the mean of standardized one-step forecast errors, and sequential Bayes factors. Finally, the proposed methods are applied to a data set comprising eight exchange rates vis-a-vis the US dollar.

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