Identifying structural shocks to volatility through a proxy-MGARCH model

We extend the classical multivariate GARCH (MGARCH) specification for volatility modeling by developing a structural MGARCH model targeting identification of shocks and volatility spillovers in a speculative return system of daily frequency. Similarly to the proxy-SVAR framework, we work with auxiliary proxy variables constructed from news-related measures to identify the underlying shock system. Our identification strategy targets full identification. We estimate the underlying structural rotation matrix by means of Givens rotations, which ensures orthogonality of the resulting shocks. In an empirical application, we identify an equity, bond and currency shock. We study the volatility spillovers implied by these labeled structural shocks. Our analysis shows that symmetric spillover regimes are rejected.