Discussion Papers 2021

CIRJE-F-1176	"Dynamic Factor, Leverage and Realized Covariances in Multivariate Stochastic Volatility"
Author Name	Yamauchi, Yuta and Yasuhiro Omori
Date	September 2021
Full Paper	PDF file
Remarks	Revised Version of CIRJE-F-1158(2020)

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 realized 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 ten of the top stocks composing the exchange traded fund linked with the investment return of the S&P500 index and the model is shown to have a stable advantage in portfolio performance.
Keywords: Dynamic factor, leverage, Markov chain Monte Carlo, portfolio performance, realized covariance matrix, stochastic volatility, stock returns

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 realized 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 ten of the top stocks composing the exchange traded fund linked with the investment return of the S&P500 index and the model is shown to have a stable advantage in portfolio performance.

Keywords: Dynamic factor, leverage, Markov chain Monte Carlo, portfolio performance, realized covariance matrix, stochastic volatility, stock returns