Suppose that a researcher is interested in modelling the correlation between the returns of the NYSE and LSE markets.
(a) Write down a simple diagonal VECH model for this problem. Discuss the values for the coefficient estimates that you would expect.
(b) Suppose that weekly correlation forecasts for two weeks ahead are required. Describe a procedure for constructing such forecasts from a set of daily returns data for the two market indices.
(c) What other approaches to correlation modelling are available?
(d) What are the strengths and weaknesses of multivariate GARCH models relative to the alternatives that you propose in part (c)?
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