Estimation of Multivariate Stochastic Volatility Model with Skew-t Distribution

Abstract

Multivariate stochastic volatility (MSV) models and their extensions have been widely developed to capture multivariate volatility of returns of asset prices, such as stock prices and foreign exchange rates. As a return distribution of asset prices tends to be skewed, this paper introduces the MSV models with a skew-t distribution. A shrinkage method for skewness parameters is also introduced. An empirical analysis using daily stock returns in the S&P500 is provided to show that the skew-t distribution and the shrinkage method improve predictive ability of the MSV model.