Edited by Nigar Hashimzade and Michael A. Thornton
Chapter 12: Conditional heteroskedasticity in macroeconomics data: UK inflation, output growth and their uncertainties
The conditional heteroskedasticity models are widely used in the financial economics and less frequently so in other fields, including macroeconomics. However, certain applications lend themselves naturally to the investigation of possible links between macroeconomic variables and their volatilities, and here the conditional heteroskedasticity approach proved to be a powerful tool. The basics of the univariate models with conditional heteroskedasticity have been introduced in Chapter 2 in this volume. In this chapter, we extend this to a bivariate model and illustrate how this approach can be used to investigate the link between UK inflation, growth and their respective uncertainties, using a particular bivariate model with conditional heteroskedasticity. For recent surveys on multivariate GARCH specifications and their importance in various areas such as asset pricing, portfolio selection, and risk management see, for example, Bauwens et al. (2006) and Silvennoinen and Teräsvirta (2007).
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