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Estimating stable latent factor models by indirect inference

Giorgio Calzolari and Roxana Halbleib ()

Journal of Econometrics, 2018, vol. 205, issue 1, 280-301

Abstract: Cross-sections of financial returns are characterized by common underlying factors and exhibit fat tails that may be captured by α-stable distributions. This paper focuses on estimating factor models with independent latent factors and idiosyncratic noises featuring a multivariate α-stable distribution constant over time (static factor models) or a time-varying conditional multivariate α-stable distribution (GARCH factor models). Although the simulation of such a distribution is straightforward, the estimation of its parameters encounters difficulties. These difficulties are overcome in this paper by implementing the indirect inference estimation method with the multivariate Student’s t as the auxiliary distribution.

Keywords: Symmetric multivariate α-stable distribution; Latent factor models; Indirect inference; Multivariate Student’s t distribution; Discrete spectral measures; GARCH models (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jeconom.2018.03.014

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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Handle: RePEc:eee:econom:v:205:y:2018:i:1:p:280-301