DYNAMIC FACTOR MODELS

Christian Gourieroux and Joann Jasiak

Econometric Reviews, 2001, vol. 20, issue 4, 385-424

Abstract: This paper introduces nonlinear dynamic factor models for various applications related to risk analysis. Traditional factor models represent the dynamics of processes driven by movements of latent variables, called the factors. Our approach extends this setup by introducing factors defined as random dynamic parameters and stochastic autocorrelated simulators. This class of factor models can represent processes with time varying conditional mean, variance, skewness and excess kurtosis. Applications discussed in the paper include dynamic risk analysis, such as risk in price variations (models with stochastic mean and volatility), extreme risks (models with stochastic tails), risk on asset liquidity (stochastic volatility duration models), and moral hazard in insurance analysis. We propose estimation procedures for models with the marginal density of the series and factor dynamics parameterized by distinct subsets of parameters. Such a partitioning of the parameter vector found in many applications allows to simplify considerably statistical inference. We develop a two- stage Maximum Likelihood method, called the Finite Memory Maximum Likelihood, which is easy to implement in the presence of multiple factors. We also discuss simulation based estimation, testing, prediction and filtering.

Keywords: Nonlinear dynamics; Factor models; Stochastic volatility; Moral hazard; Stable distributions; JEL Number: C22; C32; G10; G12 (search for similar items in EconPapers)
Date: 2001
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Working Paper: Dynamic Factor Models (1999)
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DOI: 10.1081/ETC-100106997

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