Published Papers

From Kevin Sheppard
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Multi-Step estimation of Multivariate GARCH models Pdf small icon.png, Proceedings of the International ICSC Symposium: Advanced Computing in Financial Markets, June 2001.
Estimation of large time varying covariance matrices has proven difficult since the original multivariate volatility models were introduced. In this paper, we develop the empirical properties of a new class of MV-GARCH models capable of estimating large time-varying covariance matrices. We show that the problem of multivariate conditional variance estimation can be reduced to a series of univariate GARCH processes plus an additional conditional correlation estimator. We use the model to estimate a conditional covariance of up to 100 assets using S&P 500 Sector Indies and Dow Jones Industrial Average stocks. This new estimator demonstrates very strong performance especially considering the estimators easy of implementation.

An Ordering Experiment Pdf small icon.png, Journal of Economic Behavior and Organization with A. Norman, et al.,February 2003, pp. 249-262.

Binary comparison operators form the basis of consumer set theory. If humans could only perform binary comparisons, the most efficient procedure a human might employ to make a complete preference ordering of n items would be a n log2n algorithm. But, if humans are capable of assigning each item an ordinal utility value, they are capable of implementing a more efficient linear algorithm. In this paper, we consider six incentive systems for ordering three different sets of objects: pens, notebooks, and Hot Wheels. All experimental evidence indicates that humans are capable of implementing a linear algorithm, for small sets. On the Computational Complexity of Consumer Decision Rules Pdf small icon.png, 2003, with A. Norman, et. al., Computational Economics, Vol 23, March 2004, pp 173-192.
A consumer entering a new bookstore can face more than 250,000 alternatives. The efficiency of compensatory and noncompensatory decision rules for finding a preferred item depends on the efficiency of their associated information operators. At best, item-by-item information operators lead to linear computational complexity; set information operators, on the other hand, can lead to constant complexity. We perform an experiment demonstrating that subjects are approximately rational in selecting between sublinear and linear rules. Many markets are organized by attributes that enable consumers to employ a set-selection-by-aspect rule using set information operations. In cyberspace decision rules are encoded as decision aids. Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns Pdf small icon.png, 2006, with L. Cappiello and R. Engle, Journal of Financial Econometrics Vol. 4, pp. 537-572.
This paper proposes a new generalized autoregressive conditionally heteroskedastic (GARCH) process, the asymmetric generalized dynamic conditional correlation (AG-DCC) model. The AG-DCC process extends previous specifications along two dimensions: it allows for series-specific news impact and smoothing parameters and permits conditional asymmetries in correlation dynamics. The AG-DCC specification is well suited to examine correlation dynamics among different asset classes and investigate the presence of asymmetric responses in conditional variances and correlations to negative returns. We employ the AG-DCC model to analyze the behavior of international equities and government bonds. While equity returns show strong evidence of asymmetries in conditional volatility, little is found for bond returns. However, both equities and bonds exhibit asymmetries in conditional correlations, with equities responding stronger than bonds to joint bad news. The article also finds that, during periods of financial turmoil, equity market volatilities show important linkages, and conditional equity correlations among regional groups increase dramatically. Furthermore, in January 1999 with the introduction of the euro, we document significant evidence of a structural break in correlation although not in volatility. The introduction of a fixed exchange rate regime leads to near-perfect correlation among bond returns within the European Monetary Union (EMU) countries, which is not surprising when considering the harmonization in monetary policy. However, the increase in return correlation is not restricted to bond returns in EMU countries: equity return correlation both within and outside the EMU also increases.