Factor multivariate stochastic volatility models of high dimension

Benjamin Poignard and Manabu Asai

Papers from arXiv.org

Abstract: Building upon factor decomposition to overcome the curse of dimensionality inherent in multivariate volatility processes, we develop a factor model-based multivariate stochastic volatility (fMSV) framework. We propose a two-stage estimation procedure for the fMSV model: in the first stage, estimators of the factor model are obtained, and in the second stage, the MSV component is estimated using the estimated common factor variables. We derive the asymptotic properties of the estimators, taking into account the estimation of the factor variables. The prediction performances are illustrated by finite-sample simulation experiments and applications to portfolio allocation.

Date: 2024-06, Revised 2026-02
New Economics Papers: this item is included in nep-ecm and nep-ets
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