8.2 Vector Autoregressive Models
A simple vector model useful in modeling asset returns is the vector autoregressive (VAR) model. A multivariate time series 
is a VAR process of order 1, or VAR(1) for short, if it follows the model
where 
is a k-dimensional vector, 
is a k × k matrix, and 
is a sequence of serially uncorrelated random vectors with mean zero and covariance matrix 
. In application, the covariance matrix 
is required to be positive definite; otherwise, the dimension of 
can be reduced. In the literature, it is often assumed that 
is multivariate normal.
Consider the bivariate ...
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