Generalized dynamic factor models and volatilities: Consistency, rates, and prediction intervals

Matteo Barigozzi and Marc Hallin

Journal of Econometrics, 2020, vol. 216, issue 1, 4-34

Abstract: Volatilities, in high-dimensional panels of economic time series with a dynamic factor structure on the levels or returns, typically also admit a dynamic factor decomposition. We consider a two-stage dynamic factor model method recovering the common and idiosyncratic components of both levels and log-volatilities. Specifically, in a first estimation step, we extract the common and idiosyncratic shocks for the levels, from which a log-volatility proxy is computed. In a second step, we estimate a dynamic factor model, which is equivalent to a multiplicative factor structure for volatilities, for the log-volatility panel. By exploiting this two-stage factor approach, we build one-step-ahead conditional prediction intervals for large n×T panels of returns. Those intervals are based on empirical quantiles, not on conditional variances; they can be either equal- or unequal-tailed. We provide uniform consistency and consistency rates results for the proposed estimators as both n and T tend to infinity. We study the finite-sample properties of our estimators by means of Monte Carlo simulations. Finally, we apply our methodology to a panel of asset returns belonging to the S&P100 index in order to compute one-step-ahead conditional prediction intervals for the period 2006–2013. A comparison with the componentwise GARCH benchmark (which does not take advantage of cross-sectional information) demonstrates the superiority of our approach, which is genuinely multivariate (and high-dimensional), nonparametric, and model-free.

Keywords: Volatility; Dynamic factor models; Prediction intervals; GARCH (search for similar items in EconPapers)
JEL-codes: C32 C38 C58 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Generalized Dynamic Factor Models and Volatilities: Consistency, rates, and prediction intervals (2019)
Working Paper: Generalized Dynamic Factor Models and Volatilities: Consistency, Rates, and Prediction Intervals (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:216:y:2020:i:1:p:4-34

DOI: 10.1016/j.jeconom.2020.01.003

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