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ECONOMETRIC ANALYSIS OF FINANCIAL AND ECONOMIC TIME SERIES i ADVANCES IN ECONOMETRICS Series Editors: Thomas B. Fomby and R. Carter Hill Recent Volumes: Volume 15: Nonstationary Panels, Panel Cointegration, and Dynamic Panels, Edited by Badi Baltagi Volume 16: Econometric Models in Marketing, Edited by P. H. Franses and A. L. Montgomery Volume 17: Maximum Likelihood of Misspecified Models: Twenty Years Later, Edited by Thomas B. Fomby and R. Carter Hill Volume 18: Spatial and Spatiotemporal Econometrics, Edited by J. P. LeSage and R. Kelley Pace Volume 19: Applications of Artificial Intelligence in Finance and Economics, Edited by J. M. Binner, G. Kendall and S. H. Chen ii ADVANCES IN ECONOMETRICS VOLUME 20, PART A ECONOMETRIC ANALYSIS OF FINANCIAL AND ECONOMIC TIME SERIES EDITED BY DEK TERRELL Department of Economics, Louisiana State University, Baton Rouge, LA 70803 THOMAS B. 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Notice NoresponsibilityisassumedbythePublisherforanyinjuryand/ordamagetopersonsorpropertyasamatterof productsliability,negligenceorotherwise,orfromanyuseoroperationofanymethods,products,instructionsor ideascontainedinthematerialherein.Becauseofrapidadvancesinthemedicalsciences,inparticular,independent verificationofdiagnosesanddrugdosagesshouldbemade. Firstedition2006 BritishLibraryCataloguinginPublicationData AcataloguerecordisavailablefromtheBritishLibrary. ISBN-10: 0-7623-1274-2 ISBN-13: 978-0-7623-1274-0 ISSN: 0731-9053(Series) 8 ThepaperusedinthispublicationmeetstherequirementsofANSI/NISOZ39.48-1992(PermanenceofPaper). PrintedinTheNetherlands. Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org iv CONTENTS DEDICATION ix LIST OF CONTRIBUTORS xi INTRODUCTION Dek Terrell and Thomas B. Fomby xiii REMARKS BY ROBERT F. ENGLE III AND SIR CLIVE W. J. GRANGER, KB GivenDuringThirdAnnualAdvancesinEconometrics Conference at Louisiana State University, Baton Rouge, November 5–7, 2004 GOOD IDEAS Robert F. Engle III xix THE CREATIVITY PROCESS Sir Clive W. J. Granger, KB xxiii PART I: MULTIVARIATE VOLATILITY MODELS A FLEXIBLE DYNAMIC CORRELATION MODEL Dirk Baur 3 A MULTIVARIATE SKEW-GARCH MODEL Giovanni De Luca, Marc G. Genton and Nicola 33 Loperfido v vi CONTENTS SEMI-PARAMETRIC MODELING OF CORRELATION DYNAMICS Christian M. Hafner, Dick van Dijk and Philip Hans 59 Franses A MULTIVARIATE HEAVY-TAILED DISTRIBUTION FOR ARCH/GARCH RESIDUALS Dimitris N. Politis 105 A PORTMANTEAU TEST FOR MULTIVARIATE GARCH WHEN THE CONDITIONAL MEAN IS AN ECM: THEORY AND EMPIRICAL APPLICATIONS Chor-yiu Sin 125 PART II: HIGH FREQUENCY VOLATILITY MODELS SAMPLING FREQUENCY AND WINDOW LENGTH TRADE-OFFS IN DATA-DRIVEN VOLATILITY ESTIMATION: APPRAISING THE ACCURACY OF ASYMPTOTIC APPROXIMATIONS Elena Andreou and Eric Ghysels 155 MODEL-BASED MEASUREMENT OF ACTUAL VOLATILITY IN HIGH-FREQUENCY DATA Borus Jungbacker and Siem Jan Koopman 183 NOISE REDUCED REALIZED VOLATILITY: A KALMAN FILTER APPROACH John P. Owens and Douglas G. Steigerwald 211 PART III: UNIVARIATE VOLATILITY MODELS MODELING THE ASYMMETRY OF STOCK MOVEMENTS USING PRICE RANGES Ray Y. Chou 231 Contents vii ON A SIMPLE TWO-STAGE CLOSED-FORM ESTIMATOR FOR A STOCHASTIC VOLATILITY IN A GENERAL LINEAR REGRESSION Jean-Marie Dufour and Pascale Vale´ry 259 THE STUDENT’S T DYNAMIC LINEAR REGRESSION: RE-EXAMINING VOLATILITY MODELING Maria S. Heracleous and Aris Spanos 289 ARCH MODELS FOR MULTI-PERIOD FORECAST UNCERTAINTY: A REALITY CHECK USING A PANEL OF DENSITY FORECASTS Kajal Lahiri and Fushang Liu 321 NECESSARY AND SUFFICIENT RESTRICTIONS FOR EXISTENCE OF A UNIQUE FOURTH MOMENT OF A UNIVARIATE GARCH(P,Q) PROCESS Peter A. Zadrozny 365 This page intentionally left blank viii DEDICATION Volume 20 of Advances in Econometrics is dedicated to Rob Engle and Sir Clive Granger, winners of the 2003 Nobel Prize in Economics, for their many valuable contributions to the econometrics profession. The Royal Swedish Academy of Sciences cited Rob ‘‘for methods of analyzing economic time series with time-varying volatility (ARCH),’’ while Clive was cited ‘‘for methods of analyzing economic time series with common trends (cointegration).’’ Of course, these citations are meant for public consump- tionbutwespecialistsintime-seriesanalysisknowtheircontributionsgofar beyondthesebriefcitations.ConsidersomeofRob’sothercontributionsto our literature: Aggregation of Time Series, Band Spectrum Regression, Dynamic Factor Models, Exogeneity, Forecasting in the Presence of Co- integration, Seasonal Cointegration, Common Features, ARCH-M, Mul- tivariate GARCH, Analysis of High Frequency Data, and CAViaR. Some of Sir Clive’s additional contributions include Spectral Analysis of Eco- nomicTimeSeries,BilinearTimeSeriesModels,CombinationForecasting, Spurious Regression, Forecasting Transformed Time Series, Causality, Ag- gregation of Time Series, Long Memory, Extreme Bounds, Multi-Cointe- gration, and Non-linear Cointegration. No doubt, their Nobel Prizes are richly deserved. And the 48 authors of the two parts of this volume think likewise.Theyhaveauthoredsomeveryfinepapersthatcontributenicelyto the same literature that Rob’s and Clive’s research helped build. For more information on Rob’s and Clive’s Nobel prizes you can go to the Nobel Prize website http://nobelprize.org/economics/laureates/2003/ index.html. In addition to the papers that are contributed here we are pub- lishing remarks by Rob and Clive on the nature of innovation in econometric research that were given during the Third Annual Advances in Econometrics Conference at Louisiana State University in Baton Rouge, November 5–7, 2004. We think you will enjoy reading their remarks. You come away with the distinct impression that, although they may claim they were ‘‘lucky’’ or ‘‘things just happened to fall in place,’’ having the orientation of building models that solve practical problems has been an orientation that has served them and our profession very well. ix