Leverage, Asymmetry, and Heavy Tails in the High-Dimensional Factor Stochastic Volatility Model

Mengheng Li and Marcel Scharth

Journal of Business & Economic Statistics, 2022, vol. 40, issue 1, 285-301

Abstract: We develop a factor stochastic volatility model that incorporates leverage effects, return asymmetry, and heavy tails across all systematic and idiosyncratic model components. Our model leads to a flexible high-dimensional dependence structure that allows for time-varying correlations, tail dependence, and volatility response to both systematic and idiosyncratic return shocks. We develop an efficient Markov chain Monte Carlo algorithm for posterior estimation based on the particle Gibbs, ancestor sampling, particle efficient importance sampling methods, and interweaving strategy. To obtain parsimonious specifications in practice, we build computationally efficient model selection directly into our estimation algorithm. We validate the performance of our proposed estimation method via simulation studies with different model specifications. An empirical study for a sample of U.S. stocks shows that return asymmetry is a systematic phenomenon and our model outperforms other factor models for value-at-risk evaluation.

Date: 2022
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Working Paper: Leverage, asymmetry and heavy tails in the high-dimensional factor stochastic volatility model (2018)
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DOI: 10.1080/07350015.2020.1806853

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