, Volume 17, Issue 2, pp 251-274
Date: 15 Aug 2007

Modelling asymmetric volatility dynamics by multivariate BL-GARCH models

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Abstract

The class of Multivariate BiLinear GARCH (MBL-GARCH) models is proposed and its statistical properties are investigated. The model can be regarded as a generalization to a multivariate setting of the univariate BL-GARCH model proposed by Storti and Vitale (Stat Methods Appl 12:19–40, 2003a; Comput Stat 18:387–400, 2003b). It is shown how MBL-GARCH models allow to account for asymmetric effects in both conditional variances and correlations. An EM algorithm for the maximum likelihood estimation of the model parameters is derived. Furthermore, in order to test for the appropriateness of the conditional variance and covariance specifications, a set of robust conditional moments test statistics are defined. Finally, the effectiveness of MBL-GARCH models in a risk management setting is assessed by means of an application to the estimation of the optimal hedge ratio in futures hedging.