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Generalized dynamic factor model + GARCH: exploiting multivariant information for univariate prediction

Alessi, Lucia and Barigozzi, Matteo and Capasso, Marco (2007) Generalized dynamic factor model + GARCH: exploiting multivariant information for univariate prediction. LEM working paper series, 2006/13. Laboratory of Economics and Management (LEM), Pisa, Italy.

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Identification Number: 2006/13

Abstract

We propose a new model for volatility forecasting which combines the Generalized Dynamic Factor Model (GDFM) and the GARCH model. The GDFM, applied to a large number of series, captures the multivariate information and disentangles the common and the idiosyncratic part of each series of returns. In this financial analysis, both these components are modeled as a GARCH.We compare GDFM+GARCH and standard GARCH performance on two samples up to 171 series, providing one-step-ahead volatility predictions of returns. The GDFM+GARCH model outperforms the standard GARCH in most cases. These results are robust with respect to different volatility proxies.

Item Type: Monograph (Working Paper)
Official URL: http://www.lem.sssup.it/WPLem/files/2006-13.pdf
Additional Information: © 2006 Sant'Anna School of Advanced Studies
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation and Selection
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Other Model Applications
Sets: Departments > Statistics
Collections > Economists Online
Date Deposited: 07 Jan 2011 10:06
Last Modified: 18 May 2011 09:54
URI: http://eprints.lse.ac.uk/id/eprint/31182

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