SUMMARYWe propose a class of observation-driven time series models referred to as generalized autoregressive score (GAS) models. The mechanism to update the parameters over time is the scaled score of the likelihood function. This new approach provides a unified and consistent framework for introducing time-varying parameters in a wide class of nonlinear models. The GAS model encompasses other well-known models such as the generalized autoregressive conditional heteroskedasticity, autoregressive conditional duration, autoregressive conditional intensity, and Poisson count models with time-varying mean. In addition, our approach can lead to new formulations of observation-driven models. We illustrate our framework by introducing new model specifications for time-varying copula functions and for multivariate point processes with time-varying parameters. We study the models in detail and provide simulation and empirical evidence.
We propose a new class of observation-driven time-varying parameter models for dynamic volatilities and correlations to handle time series from heavy-tailed distributions. The model adopts generalized autoregressive score dynamics to obtain a time-varying covariance matrix of the multivariate Student t distribution. The key novelty of our proposed model concerns the weighting of lagged squared innovations for the estimation of future correlations and volatilities. When we account for heavy tails of distributions, we obtain estimates that are more robust to large innovations. We provide an empirical illustration for a panel of daily equity returns.
This paper serves as an introduction and survey for economists to the field of sequential Monte Carlo methods which are also known as particle filters. Sequential Monte Carlo methods are simulation based algorithms used to compute the high-dimensional and/or complex integrals that arise regularly in applied work. These methods are becoming increasingly popular in economics and finance; from dynamic stochastic general equilibrium models in macro-economics to option pricing. The objective of this paper is to explain the basics of the methodology, provide references to the literature, and cover some of the theoretical results that justify the methods in practice.
We propose a new class of observation-driven time-varying parameter models for dynamic volatilities and correlations to handle time series from heavy-tailed distributions. The model adopts generalized autoregressive score dynamics to obtain a time-varying covariance matrix of the multivariate Student t distribution. The key novelty of our proposed model concerns the weighting of lagged squared innovations for the estimation of future correlations and volatilities. When we account for heavy tails of distributions, we obtain estimates that are more robust to large innovations. We provide an empirical illustration for a panel of daily equity returns.
Uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles. To investigate this link, we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators. The data favors a model with two volatility factors that capture shortterm and long-term interest rate uncertainty. Increases in either of them lead higher unemployment rates, but they interact with inflation in opposite directions.
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