Multivariate Return Decomposition: Theory and Implications

Stanislav Anatolyev and Nikolay Gospodinov

Econometric Reviews, 2019, vol. 38, issue 5, 487-508

Abstract: In this paper, we propose a model based on multivariate decomposition of multiplicative – absolute values and signs – components of asset returns. In the m-variate case, the marginals for the m absolute values and the binary marginals for the m directions are linked through a 2m-dimensional copula. The approach is detailed in the case of a bivariate decomposition. We outline the construction of the likelihood function and the computation of different conditional measures. The finite-sample properties of the maximum likelihood estimator are assessed by simulation. An application to predicting bond returns illustrates the usefulness of the proposed method.

Date: 2019
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Working Paper: Multivariate return decomposition: theory and implications (2015)
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DOI: 10.1080/07474938.2017.1348677

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