A Metropolis-in-Gibbs Sampler for Estimating Equity Market Factors

Sarantis Tsiaplias

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: A model incorporating common Markovian regimes and GARCH residuals in a persistent factor environment is considered. Given the intractable and approximate nature of the likelihood function, a Metropolis-in-Gibbs sampler with Bayesian features is constructed for estimation purposes. The common factor drawing procedure is effectively an exact derivation of the Kalman filter with a Markovian regime component and GARCH innovations. To accelerate the drawing procedure, approximations to the conditional density of the common component are considered. The model is applied to equity data for 18 developed markets to derive global, European, and country specific equity market factors.

Keywords: Common factors; Kalman filter; Markov switching; Monte Carlo; GARCH; Equities (search for similar items in EconPapers)
JEL-codes: C32 C51 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2007-06
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2007n18

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