Dynamic factor, leverage and realized covariances in multivariate stochastic volatility

Yuta Yamauchi and Yasuhiro Omori

Econometric Reviews, 2023, vol. 42, issue 6, 513-539

Abstract: In the stochastic volatility models for multivariate daily stock returns, it has been found that the estimates of parameters become unstable as the dimension of returns increases. To solve this problem, we focus on the factor structure of multiple returns and consider two additional sources of information: first, the stock index associated with the market factor and, second, the realized covariance matrix calculated from high-frequency data. The proposed dynamic factor model with the leverage effect and realized measures is applied to 10 top stocks composing the exchange traded fund linked with the investment return of the S&P 500 index and the model is shown to have a stable advantage in portfolio performance.

Date: 2023
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DOI: 10.1080/07474938.2023.2209007

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