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Capturing the Impact of Latent Industry-Wide Shocks with Dynamic Panel Model

KiHoon Jimmy Hong, Bin Peng () and Xiaohui Zhang ()

No 347, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Expanding the panel model of Pesaran (2006) and Bai (2009), we propose a dynamic panel specification with Bayesian approach to capture the impact of unobservable industry-wide shocks to stock price movements. We employ fundamental accounting information to control company specific shocks and equity market index to capture market wide common shocks. Our model is designed to resolve the potential multicollinearity problem that is known to exist when the industry factors are considered by extracting the industry-wide shocks using Bayesian method.

Keywords: Common Factor Structural Error; Common Shocks; Stock Price Movements; Accounting Fundamentals; Bayesian Gibbs Sampler (search for similar items in EconPapers)
JEL-codes: C11 C13 G12 (search for similar items in EconPapers)
Date: 2014-03-01
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