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A Multivariate Generalized Orthogonal Factor GARCH Model

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Executive Summary

The paper studies a factor GARCH model and develops test procedures which can be used to test the number of factors needed to model the conditional heteroskedasticity in the considered time series vector. Assuming normally distributed errors the parameters of the model can be straightforwardly estimated by the method of maximum likelihood. Inefficient but computationally simple preliminary estimates are first obtained and used as initial values to maximize the likelihood function. Maximum likelihood estimation with nonnormal errors is also straightforward.

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