A simplified approach to modeling the CO-movement of asset returns

Richard D.F. Harris, Evarist Stoja, Jon Tucker

Research output: Contribution to journalArticle

14 Citations (Scopus)
3 Downloads (Pure)

Abstract

The authors propose a simplified multivariate GARCH (generalized autoregressive conditional heteroscedasticity) model (the S-GARCH model), which involves the estimation of only univariate GARCH models, both for the individual return series and for the sum and difference of each pair of series. The covariance between each pair of return series is then imputed from these variance estimates. The proposed model is considerably easier to estimate than existing multivariate GARCH models and does not suffer from the convergence problems that characterize many of these models. Moreover, the model can be easily extended to include more complex dynamics or alternative forms of the GARCH specification. The S-GARCH model is used to estimate the minimum-variance hedge ratio for the FTSE (Financial Times and the London Stock Exchange) 100 Index portfolio, hedged using index futures, and compared to four of the most widely used multivariate GARCH models. Using both statistical and economic evaluation criteria, it was found that the S-GARCH model performs at least as well as the other models that were considered, and in some cases it was better.

Original languageEnglish
Pages (from-to)575-598
Number of pages24
JournalJournal of Futures Markets
Volume27
Issue number6
DOIs
Publication statusPublished - 1 Jun 2007
Externally publishedYes

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Modeling
Asset returns
Generalized autoregressive conditional heteroscedasticity
London Stock Exchange
Hedge ratio
Minimum variance
Complex dynamics
Economic evaluation
Evaluation criteria

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics

Cite this

A simplified approach to modeling the CO-movement of asset returns. / Harris, Richard D.F.; Stoja, Evarist; Tucker, Jon.

In: Journal of Futures Markets, Vol. 27, No. 6, 01.06.2007, p. 575-598.

Research output: Contribution to journalArticle

Harris, Richard D.F. ; Stoja, Evarist ; Tucker, Jon. / A simplified approach to modeling the CO-movement of asset returns. In: Journal of Futures Markets. 2007 ; Vol. 27, No. 6. pp. 575-598.
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