Quantile co-movement in financial markets: A panel quantile model with unobserved heterogeneity

Tomohiro Ando and Jushan Bai

MPRA Paper from University Library of Munich, Germany

Abstract: This paper introduces a new procedure for analyzing the quantile co-movement of a large number of financial time series based on a large-scale panel data model with factor structures. The proposed method attempts to capture the unobservable heterogeneity of each of the financial time series based on sensitivity to explanatory variables and to the unobservable factor structure. In our model, the dimension of the common factor structure varies across quantiles, and the factor structure is allowed to be correlated with the explanatory variables. The proposed method allows for both cross-sectional and serial dependence, and heteroskedasticity, which are common in financial markets. We propose new estimation procedures for both frequentist and Bayesian frameworks. Consistency and asymptotic normality of the proposed estimator are established. We also propose a new model selection criterion for determining the number of common factors together with theoretical support. We apply the method to analyze the returns for over 6,000 international stocks from over 60 countries during the subprime crisis, European sovereign debt crisis, and subsequent period. The empirical analysis indicates that the common factor structure varies across quantiles. We find that the common factors for the quantiles and the common factors for the mean are different.

Keywords: Data-augmentation; Endogeneity; Heterogeneous panel; Quantile factor structure; Serial and cross-sectional correlations. (search for similar items in EconPapers)
JEL-codes: C33 C38 (search for similar items in EconPapers)
Date: 2018-06-30
New Economics Papers: this item is included in nep-ecm, nep-fmk and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Quantile Co-Movement in Financial Markets: A Panel Quantile Model With Unobserved Heterogeneity (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:88765

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