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Generalized dynamic factor models and volatilities: recovering the market volatility shocks

Barigozzi, Matteo and Hallin, Mark (2015) Generalized dynamic factor models and volatilities: recovering the market volatility shocks. Econometrics Journal, 19 (1). C33-C60. ISSN 1368-4221

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Identification Number: 10.1111/ectj.12047

Abstract

Decomposing volatilities into a common market-driven component and an idiosyncratic itemspecific one is an important issue in financial econometrics. This, however, requires the statistical analysis of large panels of time series, hence faces the usual challenges associated with highdimensional data. Factor model methods in such a context are an ideal tool, but they do not readily apply to the analysis of volatilities. Focusing on the reconstruction of the unobserved market shocks and the way they are loaded by the various items (stocks) in the panel, we propose an entirely non-parametric and model-free two-step general dynamic factor approach to the problem, which avoids the usual curse of dimensionality. Applied to the S&P100 asset return dataset, the method provides evidence that a non-negligible proportion of the market-driven volatility of returns originates in the volatilities of the idiosyncratic components of returns.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2015 Wiley Blackwell
Subjects: H Social Sciences > HA Statistics
JEL classification: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
Sets: Departments > Statistics
Date Deposited: 18 Feb 2015 13:03
Last Modified: 03 Nov 2017 00:00
URI: http://eprints.lse.ac.uk/id/eprint/60980

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