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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 675:
Positivity Constraints on the Conditional Variances in the Family of Conditional Correlation GARCH Models

Tomoaki Nakatani () and Timo Teräsvirta ()

Abstract: In this article, we derive a set of necessary and sufficient conditions for positivity of the vector conditional variance equation in multivariate GARCH models with explicit modelling of conditional correlation. These models include the constant conditional correlation GARCH model of Bollerslev (1990) and its extensions. Under the new conditions, it is possible to introduce negative volatility spillovers in the model. An empirical example illustrates usefulness of having such conditions in practice.

Keywords: Multivariate GARCH; positivity constraints; conditional correlation; (follow links to similar papers)

JEL-Codes: C32; C51; G19; (follow links to similar papers)

10 pages, October 15, 2007, Revised February 14, 2008

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This paper is published as:
Nakatani, Tomoaki and Timo Teräsvirta, (2008), 'Positivity Constraints on the Conditional Variances in the Family of Conditional Correlation GARCH Models', Finance Research Letters, Vol. 5, pages 88-95



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