Forecasting High-Dimensional Financial Functional Time Series: An Application to Constituent Stocks in Dow Jones Index

Chen Tang and Yanlin Shi
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Chen Tang: Research School of Finance, Actuarial Studies and Statistics, The Australian National University, Canberra, ACT 2601, Australia
Yanlin Shi: Department of Actuarial Studies and Business Analytics, Macquarie University, North Ryde, NSW 2109, Australia

JRFM, 2021, vol. 14, issue 8, 1-13

Abstract: Financial data (e.g., intraday share prices) are recorded almost continuously and thus take the form of a series of curves over the trading days. Those sequentially collected curves can be viewed as functional time series. When we have a large number of highly correlated shares, their intraday prices can be viewed as high-dimensional functional time series (HDFTS). In this paper, we propose a new approach to forecasting multiple financial functional time series that are highly correlated. The difficulty of forecasting high-dimensional functional time series lies in the “curse of dimensionality.” What complicates this problem is modeling the autocorrelation in the price curves and the comovement of multiple share prices simultaneously. To address these issues, we apply a matrix factor model to reduce the dimension. The matrix structure is maintained, as information contains in rows and columns of a matrix are interrelated. An application to the constituent stocks in the Dow Jones index shows that our approach can improve both dimension reduction and forecasting results when compared with various existing methods.

Keywords: functional time series; high-dimensional data; Dow Jones Industrial Average; share return forecasting (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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