Dynamic Factor, Leverage and Realized Covariances in Multivariate Stochastic Volatility

Yuta Yamauchi and Yasuhiro Omori
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Yuta Yamauchi: Graduate School of Economics, The University of Tokyo
Yasuhiro Omori: Faculty of Economics, The University of Tokyo

No CIRJE-F-1158, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: In the stochastic volatility models for multivariate daily stock returns, it has been found that the estimates of parameters become unstable as the dimension of returns increases. To solve this problem, we focus on the factor structure of multiple returns and consider two additional sources of information: first, the realized stock index associated with the market factor, and second, the realized covariance matrix calculated from high frequency data. The proposed dynamic factor model with the leverage effect and realized measures is applied to ten of the top stocks composing the exchange traded fund linked with the investment return of the S&P500 index and the model is shown to have a stable advantage in portfolio performance.

Pages: 47pages
Date: 2020-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2020cf1158

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