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Title: Negative volatility spillovers in the unrestricted ECCC-GARCH model
Authors: Conrad, C
Karanasos, M
Keywords: GARCH model;Volatility feedback;Negative volatility spillovers;Conditional covariance matrix
Issue Date: 2010
Publisher: Cambridge University Press
Citation: Econometric Theory, 26(3), 838 - 862, 2010
Abstract: This paper considers a formulation of the extended constant or time-varying conditional correlation GARCH model that allows for volatility feedback of either the positive or negative sign. In the previous literature, negative volatility spillovers were ruled out by the assumption that all the parameters of the model are nonnegative, which is a sufficient condition for ensuring the positive definiteness of the conditional covariance matrix. In order to allow for negative feedback, we show that the positive definiteness of the conditional covariance matrix can be guaranteed even if some of the parameters are negative. Thus, we extend the results of Nelson and Cao (1992) and Tsai and Chan (2008) to a multivariate setting. For the bivariate case of order one, we look into the consequences of adopting these less severe restrictions and find that the flexibility of the process is substantially increased. Our results are helpful for the model-builder, who can consider the unrestricted formulation as a tool for testing various economic theories.
Description: Copyright @ 2010 Cambridge University Press.
ISSN: 0266-4666
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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