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Volatility Comovement: a multifrequency approach

Abstract : We implement a multifrequency volatility decomposition of three exchange rates and show that components with similar durations are strongly correlated across series. This motivates a bivariate extension of the Markov-Switching Multifractal (MSM) introduced in Calvet and Fisher (J. Econ. 105 (2001) 27, J. Financ. Econ. 2 (2004) 49). Bivariate MSM is a stochastic volatility model with a closed-form likelihood. Estimation can proceed by maximum likelihood for state spaces of moderate size, and by simulated likelihood via a particle filter in high-dimensional cases. We estimate the model and confirm its main assumptions in likelihood ratio tests. Bivariate MSM compares favorably to a standard multivariate GARCH both in- and out-of-sample. A parsimonious multifrequency factor structure is finally proposed for multivariate settings with potentially many assets.
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Submitted on : Wednesday, February 24, 2010 - 4:22:21 PM
Last modification on : Thursday, May 2, 2019 - 12:26:05 PM

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Laurent-Emmanuel Calvet, Adlai J. Fisher, Samuel B. Thompson. Volatility Comovement: a multifrequency approach. Econometrics, MDPI, 2006, Vol.131,n°1-2, pp.179-215. ⟨10.1016/j.jeconom.2005.01.008⟩. ⟨hal-00459667⟩

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