An Empirical Study of Asian Stock Volatility Using Stochastic Volatility Factor Model: Factor Analysis and Forecasting

Silvia S.W. Lui
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Silvia S.W. Lui: Queen Mary, University of London

No 581, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: This paper is an empirical study of Asian stock volatility using stochastic volatility factor (SVF) model of Cipollini and Kapetanios (2005). We adopt their approach to carry out factor analysis and to forecast volatility. Our results show some Asian factors exhibit long memory that is in line with existing empirical findings in financial volatility. However, their local-factor SVF model is not powerful enough in forecasting Asian volatility. This has led us to propose an extension to a multi-factor SVF model. We also discuss how to produce forecast using this multi-factor model.

Keywords: Stochastic volatility; Local-factor model; Multi-factor model; Principal components; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C33 C53 G15 (search for similar items in EconPapers)
Date: 2006-12-01
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:581

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