Library Header Image
LSE Research Online LSE Library Services

Modelling multivariate volatilities via latent common factors

Li, Weiming, Gao, Jing, Li, Kunpeng and Yao, Qiwei ORCID: 0000-0003-2065-8486 (2016) Modelling multivariate volatilities via latent common factors. Journal of Business and Economic Statistics, 34 (4). pp. 564-573. ISSN 0735-0015

PDF - Accepted Version
Download (420kB) | Preview

Identification Number: 10.1080/07350015.2015.1092975


Volatility, represented in the form of conditional heteroscedasticity, plays an impor- tant role in controlling and forecasting risks in various financial operations including asset pricing, portfolio allocation, and hedging futures. However, modeling and fore- casting multi-dimensional conditional heteroscedasticity are technically challenging. As the volatilities of many financial assets are often driven by a few common and latent factors, we propose in this paper a dimension reduction method to model a multivariate volatility process and to estimate a lower-dimensional space, to be called the volatility space, within which the dynamics of the multivariate volatility process is confined. The new method is simple to use, as technically it boils down to an eigenanalysis for a non- negative definite matrix. Hence it is applicable to the cases when the number of assets concerned is in the order of thousands (using an ordinary PC/laptop). On the other hand, the model has the capability to cater for complex conditional heteroscedastic- ity behavior for multi-dimensional processes. Some asymptotic properties for the new method are established. We further illustrate the new method using both simulated and real data examples.

Item Type: Article
Official URL:
Additional Information: © 2016 The Authors
Divisions: Statistics
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HF Commerce
Date Deposited: 25 Oct 2016 11:28
Last Modified: 05 Jun 2024 17:06

Actions (login required)

View Item View Item


Downloads per month over past year

View more statistics