A0700
Title: A multivariate ARCH($\infty$) model with exogenous variables and dynamic conditional betas
Authors: Julien Royer - CREST (France) [presenting]
Jean-Michel Zakoian - CREST (France)
Christian Francq - CREST and University Lille III (France)
Abstract: Factor models are highly common in the financial literature. Recent advances allow relaxing the constancy of slope coefficients (the so-called betas) by considering conditional regressions. The theory on the estimation of these dynamic conditional betas however usually relies on short memory volatility models, which can be restrictive in empirical applications. Moreover, exogenous variables have proven useful in recent studies on volatility modeling. We introduce a multivariate framework allowing for time-varying betas in which covolatilities can exhibit higher persistence than the standard exponential decay. Covariates are included in the dynamics of both conditional variances and betas. We establish stationarity conditions for the proposed model and prove the consistency and asymptotic normality of the QML estimator. Monte Carlo experiments are conducted to assess the performance of the estimation procedure in finite sample. Finally, we discuss the choice of potential relevant exogenous variables and illustrate the pertinence of the model on real data applications.
