Simple Multivariate Conditional Covariance Dynamics Using Hyperbolically Weighted Moving Averages

Abstract

Abstract This paper considers a class of multivariate ARCH models with scalar weights. A new specification with hyperbolic weighted moving average (HWMA) is proposed as an analogue of the EWMA model. Despite the restrictive dynamics of a scalar weight model, the proposed model has a number of advantages that can deal with the curse of dimensionality. The empirical application illustrates that the (pseudo) out-of-sample multistep forecasts can be surprisingly more accurate than those from the DCC model.