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econ589multivariateGarch.r
R examples for lectures on multivariate GARCH models
Eric Zivot
May 8th, 2012
update history

# load libraries
library(PerformanceAnalytics)
library(quantmod)
library(rugarch)
library(car)
library(FinTS)
library(rmgarch)
options(digits=4)
computer = "work"
if (computer == "home") {
setwd("C:\\Users\\ezivot\\Dropbox\\econ589\\R\\")
}
if (computer == "work") {
setwd("C:\\Users\\ezivot.SOCIOLOGY\\Dropbox\\econ589\\R\\")
}
source("covEWMA.r")
# download data
symbol.vec = c("MSFT", "^GSPC")
getSymbols(symbol.vec, from ="2000-01-03", to = "2012-04-03")
colnames(MSFT)
start(MSFT)
end(MSFT)
# extract adjusted closing prices
MSFT = MSFT[, "MSFT.Adjusted", drop=F]
GSPC = GSPC[, "GSPC.Adjusted", drop=F]
# plot prices
plot(MSFT)
plot(GSPC)
# calculate log-returns for GARCH analysis
MSFT.ret = CalculateReturns(MSFT, method="log")
GSPC.ret = CalculateReturns(GSPC, method="log")
# remove first NA observation
MSFT.ret = MSFT.ret[-1,]
GSPC.ret = GSPC.ret[-1,]
colnames(MSFT.ret) ="MSFT"
colnames(GSPC.ret) = "GSPC"
# create combined data series
MSFT.GSPC.ret = merge(MSFT.ret,GSPC.ret)
# plot returns
plot(MSFT.ret)
plot(GSPC.ret)

# scatterplot of returns
plot( coredata(GSPC.ret), coredata(MSFT.ret), xlab="GSPC", ylab="MSFT",
type="p", pch=16, lwd=2, col="blue")
abline(h=0,v=0)
#
# compute rolling correlations
#
# chart.RollingCorrelation(MSFT.ret, GSPC.ret, width=20)
cor.fun = function(x){
cor(x)[1,2]
}
cov.fun = function(x){
cov(x)[1,2]
}
roll.cov = rollapply(as.zoo(MSFT.GSPC.ret), FUN=cov.fun, width=20,
by.column=FALSE, align="right")
roll.cor = rollapply(as.zoo(MSFT.GSPC.ret), FUN=cor.fun, width=20,
by.column=FALSE, align="right")
par(mfrow=c(2,1))
plot(roll.cov, main="20-day rolling covariances",
ylab="covariance", lwd=2, col="blue")
grid()
abline(h=cov(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
plot(roll.cor, main="20-day rolling correlations",
ylab="correlation", lwd=2, col="blue")
grid()
abline(h=cor(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
par(mfrow=c(1,1))
#
# calculate EWMA covariances and correlations
#
lambda <- 0.94
cov.ewma <- covEWMA(as.data.frame(MSFT.GSPC.ret), lambda=lambda)
## 2. extract conditional variance and correlation
### conditional variance
MSFT.GSPC.cond.cov <- cov.ewma[,2,1];
### conditional correlation
t <- length(cov.ewma[,1,1]);
MSFT.GSPC.cond.cor<- rep(0,t);
for (i in 1:t) {
MSFT.GSPC.cond.cor[i]<- cov2cor(cov.ewma[i,,])[1,2];
}
### Plots
par(mfrow=c(2,1))
plot(x=time(as.zoo(MSFT.GSPC.ret)), y=MSFT.GSPC.cond.cov,
type="l", xlab="Time", ylab="Covariance", lwd=2, col="blue",
main="EWMA Covariance between MSFT and S&P500");
grid()
abline(h=cov(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
plot(x=time(as.zoo(MSFT.GSPC.ret)), y=MSFT.GSPC.cond.cor,
type="l", xlab="Time", ylab="Correlation", lwd=2, col="blue",
main="EWMA Correlation between MSFT and S&P500");
grid()

abline(h=cor(MSFT.GSPC.ret)[1,2], lwd=2, col="red")

par(mfrow=c(1,1))
# compute rolling covariances and correlations using longer window
roll.cov = rollapply(as.zoo(MSFT.GSPC.ret), FUN=cov.fun, width=252,
by.column=FALSE, align="right")
roll.cor = rollapply(as.zoo(MSFT.GSPC.ret), FUN=cor.fun, width=252,
by.column=FALSE, align="right")
par(mfrow=c(2,1))
plot(roll.cov, main="252-day rolling covariances",
ylab="covariance", lwd=2, col="blue")
grid()
abline(h=cov(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
plot(roll.cor, main="252-day rolling correlations",
ylab="correlation", lwd=2, col="blue")
grid()
abline(h=cor(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
par(mfrow=c(1,1))

# compute EWMA covariances and correlations using longer half-life

half.life = 125
lambda = exp(log(0.5)/half.life)
cov.ewma <- covEWMA(MSFT.GSPC.ret, lambda=lambda)
## 2. extract conditional variance and correlation
### conditional variance
MSFT.GSPC.cond.cov <- cov.ewma[,2,1]
### conditional correlation
t <- length(cov.ewma[,1,1])
MSFT.GSPC.cond.cor<- rep(0,t)
for (i in 1:t) {
MSFT.GSPC.cond.cor[i]<- cov2cor(cov.ewma[i,,])[1,2]
}
### Plots
par(mfrow=c(2,1))
plot(x=time(as.zoo(MSFT.GSPC.ret)), y=MSFT.GSPC.cond.cov,
type="l", xlab="Time", ylab="Covariance", lwd=2, col="blue",
main="EWMA Covariance between MSFT and S&P500")
grid()
abline(h=cov(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
plot(x=time(as.zoo(MSFT.GSPC.ret)), y=MSFT.GSPC.cond.cor,
type="l", xlab="Time", ylab="Correlation", lwd=2, col="blue",
main="EWMA Correlation between MSFT and S&P500")
grid()
abline(h=cor(MSFT.GSPC.ret)[1,2], lwd=2, col="red")
par(mfrow=c(1,1))
#
# DCC estimation
#
# univariate normal GARCH(1,1) for each series
garch11.spec = ugarchspec(mean.model = list(armaOrder = c(0,0)),
variance.model = list(garchOrder = c(1,1),
model = "sGARCH"),
distribution.model = "norm")

# dcc specification - GARCH(1,1) for conditional correlations

dcc.garch11.spec = dccspec(uspec = multispec( replicate(2, garch11.spec) ),
dccOrder = c(1,1),
distribution = "mvnorm")
dcc.garch11.spec
dcc.fit = dccfit(dcc.garch11.spec, data = MSFT.GSPC.ret)
class(dcc.fit)
slotNames(dcc.fit)
names(dcc.fit@mfit)
names(dcc.fit@model)
#
#
#
#

many extractor functions - see help on DCCfit object

coef, likelihood, rshape, rskew, fitted, sigma,
residuals, plot, infocriteria, rcor, rcov
show, nisurface

# show dcc fit

dcc.fit
# plot method
plot(dcc.fit)
# Make a plot selection (or 0 to exit):
#
# 1: Conditional Mean (vs Realized Returns)
# 2: Conditional Sigma (vs Realized Absolute Returns)
# 3: Conditional Covariance
# 4: Conditional Correlation
# 5: EW Portfolio Plot with conditional density VaR limits
# conditional sd of each series
plot(dcc.fit, which=2)
# conditional correlation
plot(dcc.fit, which=4)
# extracting correlation series
ts.plot(rcor(dcc.fit)[1,2,])
#
# forecasting conditional volatility and correlations
#
dcc.fcst = dccforecast(dcc.fit, n.ahead=100)
class(dcc.fcst)
slotNames(dcc.fcst)
class(dcc.fcst@mforecast)
names(dcc.fcst@mforecast)
# many method functions - see help on DCCforecast class
# rshape, rskew, fitted, sigma, plot, rcor, rcov, show
# show forecasts
dcc.fcst
# plot forecasts
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