COMFORT: A common market factor non-Gaussian returns model

Marc S. Paolella and Paweł Polak

Journal of Econometrics, 2015, vol. 187, issue 2, 593-605

Abstract: A new multivariate time series model with various attractive properties is motivated and studied. By extending the CCC model in several ways, it allows for all the primary stylized facts of financial asset returns, including volatility clustering, non-normality (excess kurtosis and asymmetry), and also dynamics in the dependency between assets over time. A fast EM-algorithm is developed for estimation. Each element of the vector return at time t is endowed with a common univariate shock, interpretable as a common market factor. This leads to the new model being a hybrid of GARCH and stochastic volatility, but without the estimation problems associated with the latter, and being applicable in the multivariate setting for potentially large numbers of assets. A feasible technique which allows for multivariate option pricing is presented, along with an empirical illustration.

Keywords: CCC; Common jumps; Density forecasting; EM-algorithm; Fat tails; GARCH; Multivariate asymmetric variance gamma distribution; Multivariate generalized hyperbolic distribution; Multivariate option pricing; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C51 C53 G11 G17 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:187:y:2015:i:2:p:593-605

DOI: 10.1016/j.jeconom.2015.02.041

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